Step-by-step guidelines to add a new co-founder in a private company
There are many forms of business organizations, and a company suggests a body obtaining a unique character of being a separate legal entity. It is dressed with a legal personality to have its existence different and distinct from its members. A company is an artificial individual having continuous succession and is untouched by the changes in the role of its members.
A private company is a limited liability corporation having various ownership. Still, their shares are not provided to the public and should abide by fewer legal compliances than public companies. A private limited company registration could possibly initiate business instantly post-incorporation. It is not obliged to issue prospectus or convey statutory meetings that’s why it has less legal formalities to follow. Thus, legal formalities are less demanding for private companies. A business plan relies upon how founders intend to strategize, manage intricate, complex plans and unpredictable situations with their expertise.
The founder is the critical pillar in the business, whose mindset creates the business and plays a crucial role in inception. Founder also provides intelligence, quality, funding or assets, independently or with the help of co-founders. The idea of business originates from the founder; he/she should execute the idea to give reality to the concept. The founder is often labelled with his/her innovation and creativity, insight, strength of will, sense of fearlessness. He/she owns every risk associated with it and also holds the rewards. The initial proprietorship lies with a founder who works to bring in resources to make an enterprise.
Also Read: What to choose – Proprietorship or Private Limited Company?
The idea of inception not necessarily comes from the one founder; many times, a founder might need additional individuals who join the company as co-founders at the earliest stage and assists in recruiting, financing, product development, strategizing, and mentoring. Co-founders possess focused and deeper involvement for a more extended period. They provide the much-needed commitment and invaluable experience for a high potential start-up. Before incorporation, the idea might create betwixt two or more individuals who become co-founders. Post-incorporation, co-founders might be introduced with the percentage of share that they would own and duties of management and control, mentioned in the co-founder’s agreement, if the existing founders, while considering the possibilities, senses that an additional individual with skillset, knowledge and professional expertise is needed to push the development and growth of the company or if the preceding co-founder intends to quit or retire or such scenario arises that the position and responsibility stay vacant.
A private company might add a new co-founder by agreeing with that person, choosing the percentage of share for him/her and his/her responsibility of management and control; such agreement is known as the co-founder’s agreement.
It primarily governs the professional relationship betwixt the founder who has initiated the new business or who wants to execute their ideas into reality. The agreement’s objective is to decide the company’s functions, relationship, and obligations betwixt co-founders legally binding via a formal written agreement. Co-founders must determine business terms and maintain clarity through agreement about investment and resources to operate professionally. The factors that are needed to be undertaken are the business’s future goals, time devoted to co-founders, allocating the responsibilities among the co-founders and a profit-sharing ratio among the founders. The agreement’s purpose is to minimize disputes in the business. It offers protection to the core aspects of the business when the agreement needs an open discussion betwixt partners related to functional aspects.
The following components have to be in the co-founder’s agreement
Business definition and its milestone – explaining the potential venture of the company with clarity and formulating business terms are crucial to restrict the existing co-founder from engaging in the use of the brand name or competing business. A particular milestone might be mentioned to decide the future potential of the business idea.
Proprietorship – such components deal with equity, percentage of several shares owned by each co-founder. Contribution by each co-founder and role must be considered. The division of proprietorship is given below;
Rule of N – equal distribution in betwixt the members.
Contribution-based on efforts and capital – it includes consideration of efforts made by a person in working or via his/her capital contribution, and division of proprietorship shares is made accordingly.
Vesting – allocating shares of the company and right to buy back shares.
Dis-ownership and departure – in case founder’s departure, the agreement should explicitly decide the founder’s rights, and there should be no limits on selling away of the shares.
Conflicts and disputes might arise on the profit distribution in business; hence there has to be clarity and definite clarification in agreement about the distribution of profits among the partners.
Responsibilities and roles – the co-founder’s agreement should explicitly decide the roles and responsibilities of every member and its extent to avoid future disputes among founders. The decision-making process must offer leverage for redefining roles at different stages if the need arises.
Firing the founder – it should be mentioned in the agreement at which manner and even a founder will be fired. It is a vital issue, and there might be numerous disputes in the future in the agreement that does not mention the circumstances to resolve such issues.
Decision-making – to avoid disputes arising out of the abstract situation in the process of development of business, a co-founder agreement should explicitly mention how decisions are to be made.
Also Read: 10 Essential Legal Documents for Startups
Conflict resolution – alternative predetermined conflict resolution method to settle the disputes has to be stated if members cannot resolve disagreements.
Non-compete – it is crucial in business to make sure that any founder who steps out of business would not compete with the original business.
A loan from founders – the agreement should clarify how the loans from founders will be treated. Otherwise, stated in the agreement, the founder’s loan has to be paid back with interest or other benefits.
Compensation – initially, it is crucial to decide provisions for profits, revenue, reimbursement and compensation of the founders. These factors are essential as it includes rewards and risk. Hence the provision has to be mentioned in the agreement.
Adding new co-founders – it would be apt if the agreement offers a clause stating how a new co-founder might be added and the extent of his/her role in the business.
Anandan Mudaliar pursuing Company Secretary is associated with LegalWiz.in as Operational Executive of the Company. He is handling various MCA related compliance along with good grip in Company, LLP and other various legal drafting.