As a startup founder, you may have an innovative idea, a developed business plan, and motivated employees to work with, however, building a successful company is a complex and challenging process. One key factor determining a startup's success or failure is the relationship between its co-founders or B2B partners. Without proper legal protections, a startup can quickly find itself in hot water. That's where a co-founder's agreement or B2B partnership agreement comes into play.
In this article, we will explore how to create a founders’ agreement for startups outlining each founder's rights and obligations, providing clarity and structure to your partnership. We will also define the features of the B2B partnership agreement.
While the specific clauses in a co-founder agreement may vary depending on the nature of the business and the individuals involved, here are some key clauses that are commonly included.
Every co-founder agreement must be started with a description of startup purposes. What are you going to do and achieve through partnership in that startup? You need to write an answer to this question in that part of the agreement.
The equity ownership clause in a co-founder agreement outlines the initial equity distribution between co-founders and can include provisions related to vesting, conditions for earning equity, and any equity-related matters.
Let's take an example of a startup company that has three co-founders. The equity ownership can be divided among them as follows:
The percentage ownership could change over time as new capital is invested into the company, either by the partners for a startup or outside investors.
In the agreement must be a provision describing the contribution to the startup’s authorized capital by each co-founder. These can be cash, intellectual property, services or labour.
A vesting schedule is a predetermined timeline that outlines when co-founders will gain ownership rights over their allocated equity or shares in the company. The task is to set how long the vesting period is and under what conditions the co-founders will earn their equity. One more question that must be answered is what happens if a co-founder leaves the company before their equity vests. Usually, if a co-founder leaves the company for any reason before their equity fully vests, they will only be entitled to the portion of equity that has vested up to the point of departure.
A clause must exist in the co-founder agreement to allow the sale or transfer of equity to third parties without the consent of the other co-founders. Sales or transfers can also be restricted by adding a priority purchase clause, which is described in our article about Shareholders' Agreements for IT Companies.
What are the titles and roles of the founders? Titles can vary, and while you will most frequently see CEO, CFO, CTO, or CMO, there are no restrictions on founder titles. With so many possibilities, it is imperative to clearly outline the roles and responsibilities of each founder based on their expertise, skills, and commitment. At the beginning, it is beneficial for the most crucial procedures in the startup to be managed by the founders. According to First Round Capital, enterprise companies with at least one technical founder perform 230% better than non-technical colleagues.
Moreover, in the agreement, founders can include performance metrics and milestones to ensure progress and accountability. Here are some examples of performance metrics and milestones that can be included:
In this part of the agreement, you can identify and track relevant KPIs that are specific to your industry and business model, such as customer acquisition cost (CAC), customer lifetime value (CLV), or net promoter score (NPS).
A study by Harvard Business Review found that startups with clear performance metrics and engaged employees are 3.5 times more likely to succeed, so let’s identify your metrics and set them in the co-founders’ agreement.
The task is to outline how major decisions will be made within the company, including voting rights, decision thresholds, and any supermajority requirements.
Questions that must be solved in the agreement:
What salary and benefits will each founder receive for their role in the business? If the company starts generating profits, how will dividends be distributed? These provisions help clarify how the company's earnings will be shared among the co-founders and can prevent disputes. Here are some key questions to be resolved in the dividends section of the agreement:
If any founder brings intellectual property (IP) to the business, such as inventions, trade secrets, trademarks, patents, business plans, designs, or software codes, it is important to determine if the founder will transfer the pre-existing IP to the startup or retain individual ownership. In order to protect subsequent IP, you should add a provision to the co-founder’s agreement stating: each co-founder agrees that all intellectual property created during the startup's operations, whether individually or collectively, must be the company's exclusive property.
When an IP is created by a co-founder individually before the formation of the startup but is used or incorporated into the company's business operations, this IP becomes the startup’s property and can’t be returned.
If a co-founder leaves the company, they must not use any startup-owned IP without the company's consent. This applies to the use of IP in any business activities outside of the startup.
The task is to emphasize the importance of keeping the company's information confidential and outline consequences for breaches of confidentiality. For this reason, we advise you to sign with all co-founders a separate Non-disclosure agreement. Usually, this document includes clauses that prevent co-founders from competing with the business or soliciting employees or customers for a certain period after leaving the company.
Deadlock is a situation where co-founders cannot reach a consensus or agreement on a significant decision or issue. This can impede the progress of the company and create internal conflicts, so the co-founders’ agreement must include a deadlock resolution mechanism. Read about 6 scenarios for getting out of the conflict here.
By including a dispute resolution provision, you establish a clear process for resolving conflicts, which helps prevent these disputes from escalating and causing disruptions to the business. You need to set steps to follow when a dispute arises. The co-founders may attempt to resolve the dispute through negotiation or mediation. They can select a qualified, neutral mediator, who will facilitate discussions and negotiations to reach a consensus. If mediation does not result in a resolution within a specified term, for example, 30 days, the dispute will be submitted to binding arbitration. For this reason, you need to set what exact arbitration will solve the dispute and what law will be used.
The termination and removal provisions address the circumstances and procedures under which a co-founder may be terminated or removed from the company. Every agreement must include the grounds for termination or removal, notice period, vesting and equity considerations, and buyout options.
Let's take an example. The partner undertakes to notify about leaving the company 60 calendar days before the withdrawal date. This partner will receive a share of the company's profit according to his percentage in the business equity. Other partners can buy a share from a partner who wants to leave the company at the price current at the time of leaving the partnership for 3 months from the moment of notification of the partner's withdrawal.
A B2B partnership agreement outlines the terms and conditions governing a strategic collaboration between two or more businesses. The document is similar to a co-founders agreement, but will differ in several provisions. B2B partnership agreements usually do not involve equity distribution within the partnering businesses. Instead, they focus on the terms and conditions of the collaboration with allocating profit.
B2B partnership agreements outline the terms and conditions of the collaboration between the startup and external partners. They address areas like product development, marketing, sales, or distribution efforts that the startup and partner businesses engage in together.
These differences must be taken into consideration when drafting documents for startup running.
The startup partnership agreement is a framework for resolving disputes and disagreements that may arise between the co-founders or B2B partners. By following these tips and incorporating these key points into your document, you create a base that fosters transparency and trust. This sets the stage for a harmonious working relationship, allowing your startup to thrive and overcome challenges effectively.
