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Startup

Cofounder Agreement

California

Asked on Jun 14, 2025

Is it necessary to have a co-founder agreement when starting a business?

I am in the process of starting a business with a co-founder, and we have discussed various aspects of our partnership such as equity distribution, roles and responsibilities, and decision-making authority. However, we are unsure if it is necessary to have a formal co-founder agreement in place to protect our interests and ensure a smooth working relationship. We want to understand the importance and potential benefits of having a legally binding agreement in order to make an informed decision.

Answers from 1 Lawyer

Answer

Startup

California

Answered 318 days ago

It's not necessary but it can be a really good idea. You'll want to address things like the equity split, vesting schedule, each cofounder's contributions (cash, IP, time, etc.), how much time each cofounder will be expected to spend (and if someone is starting out part-time, when they are expected to go full-time), and you may want to address consequences for failing to meet the required contributions and time - for example, company can claw back shares at original price and expel the cofounder.

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What are the key elements that should be included in a cofounder agreement?

I am in the process of starting a new business venture with two other individuals, and we are currently in the early stages of forming our cofounder agreement. We want to ensure that our agreement covers all the necessary aspects to protect our interests and clarify our rights and responsibilities. We have already discussed equity distribution, roles and responsibilities, and decision-making processes, but we are curious to know if there are any other key elements that should be included in our cofounder agreement to ensure a smooth and successful partnership in the long run.

4.9 (13)

Damien B.

Answered Dec 17, 2024

Hello! I am a New York Attorney with a law office in Long Island City. Thank you for answer your question. A comprehensive co-founder agreement is crucial for establishing a solid foundation for your new business venture. Since you've already covered equity distribution, roles, and decision-making processes, you're on the right track. Here are key additional elements to include ensuring all parties are protected and potential challenges are addressed: 1. Contributions and Commitments: Clearly define the initial contributions and ongoing commitments of each co-founder. 2. Vesting Schedule: Implement an equity vesting schedule to secure long-term commitment. 3. Ownership of Intellectual Property: Specify that all developed intellectual property belongs to the company. 4. Salaries and Compensation: Decide on founders' compensation arrangements. 5. Dispute Resolution: Establish a process for resolving conflicts efficiently. 6. Founder Exit and Buyout Clauses: Define procedures for different exit scenarios. 7. Decision-Making Authority: Clarify decision-making protocols. 8. Non-Compete and Non-Solicitation Clauses: Protect the business from competing actions. 9. Confidentiality Agreement: Enforce confidentiality of sensitive information. 10. Dissolution of the Business: Outline steps for winding down the company. 11. Amendments to the Agreement: Specify how the agreement can be updated. 12. Governing Law and Jurisdiction: Determine the governing laws in case of disputes. Consider involving a lawyer to review the agreement for legal compliance. These elements will provide a clear roadmap to navigate conflicts and ensure a successful partnership. Does this address all your concerns? Feel free to seek clarification on any specific section! There should be a button on your page that allows you to request a proposal from me specifically for the legal service you request. Best regards, Attorney Damien B.

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Startup

Terms Sheet

California

Asked on Mar 30, 2021

What are the most important things to look at in a term sheet?

I am expecting to get a few term sheets from investors in the next month. I want to know what I should be looking for.

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4.9 (5)

Ramsey T.

Answered Mar 30, 2021

Every term in a term sheet, by definition is important. A term sheet is a summary of the most important parts of a "deal" - a way of getting to and negotiating the hear of the deal before filling in the gaps with boilerplate. Therefore, you should make sure that you understand all of what has been proposed and negotiated in the term sheet - even the provision that don't seem that important - because they wouldn't be in the term sheet if they weren't a key term to one side or the other.

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Startup

Convertible Note

California

Asked on Jul 30, 2023

Convertible note vs. equity financing?

I am an entrepreneur and I am in the process of raising capital for my startup. I am considering both convertible note and equity financing options and am trying to decide which one is best suited for my company. I need to understand the key differences between the two options to make an informed decision.

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Thaddeus W.

Answered Sep 8, 2023

Good question. Convertible notes (as well as SAFE's, discussed below) differ from equity in several respects. The most fundamental difference is that a convertible note is debt. A second major difference is that, although the note is debt, its terms include the noteholder's right to acquire an equity position in the future; if a certain event later occurs (defined in the note, but typically the sale of preferred stock to a future investor (e.g. a venture capital firm), but also a sale of the company can have a similar effect), this will trigger the note to convert into equity and the note is "satisfied" ... that is, the debt is extinguished when the note converts and the holder thereby becomes an equity holder (typically coming to own shares of preferred stock very similar to that issued to the future investors in that triggering event). These two differences are related to a third. A convertible note is often issued without a valuation of the company. For example, when a startup business has no operating history, it is impossible for the startup founders or the investor to decide what the company is worth. Equity cannot be issued for a fair market value (FMV), since there is no basis to determine what the FMV is. A convertible note resolves that by giving the investor (the note holder) the right to convert the note into equity later on, when another investor and the company can agree on a company valuation. In other words, the convertible note allows the company to "kick the can (of valuation) down the road" to be dealt with at another time. But, since a convertible note is debt, is has a repayment provision, and normally carries interest. This means that the note is carried on the company's balance sheet as debt, and presents the company with the future obligation to repay the note if a conversion event has not happened before the note's maturity date. So, SAFE's are often used, especially now that they have become so familiar to investors. (SAFE stands for Simple Agreement for Future Equity). Essentially, as SAFE is a convertible note without the debt features. A SAFE carries no interest and does not have to be repaid. The investor in a SAFE will normally be sophisticated and able to assess the chances the company will do well enough for a conversion event (the issuance of preferred stock, or a sale of the company) to result in the investor's SAFE converting, and thus give the investor comfort that would otherwise be lacking in an instrument that has no repayment obligation. Like a convertible note, a SAFE kicks the can of valuation down the road, where a valuation can later be determined by the company and a future investor. Founders should exercise caution in issuing convertible notes or SAFE's. Among other reasons, founders commonly do not appreciate the impact that convertible notes or SAFE's can have on the founders' own ownership. Convertible notes and SAFE's often include a feature called a "valuation cap." This can result in surprising dilution, as well as the issuance of equity to the converting note or SAFE holder at what is effectively a very low price per share, costing the company far more than the founders may have expected. Also, notes and SAFE's with very similar, but different, terms can result in a complicated capitalization table, making negotiations with venture capital firms later on more difficult, an equity transaction more complex, and thus the process more time-consuming and (therefore) more expensive.

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Startup

Software Agreement

Florida

Asked on Jun 9, 2023

Software agreement and maintenance?

I am an entrepreneur who is planning to launch a new software product. I am in the process of negotiating a software agreement with a potential partner, and I need to make sure that I understand my obligations regarding maintenance of the software. I have limited experience in this area and need to ensure that I have a comprehensive agreement that covers all of the necessary points.

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5.0 (3)

Daniel D.

Answered Jul 18, 2023

Your maintenance obligations will largely depend on what is written into the software agreement between you and your partner. If you and your partner agree you can have a very broad or very limited obligation, but it should be clear so you avoid any disputes in the future. A comprehensive agreement can include any provisions you and your partner agree on as long as it does not violate State Law or Public Policy.

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Corporate

Founders' Agreement

Texas

Asked on Sep 12, 2021

Signing Founders Agreement as non-us resident?

I am from Ecuador and I am going to sign a Founder's Agreement with a person from Texas. I want to know in detail what are things I must take into consideration before signing this agreement.

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Jane C.

Answered Sep 17, 2021

I would look at the provisions related to taxes, intellectual property, and non compete provisions. I suggest you review the terms with an attorney before signing.

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Is it necessary to have a co-founder agreement when starting a business?

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