Starting a new business with your co-founder is an exciting experience, yet the legal arrangements that come hand-in-hand with that can become tedious and complicated very quickly.
SeedLegals has drastically simplified this.
In this Article, we’ll cover:
- Roles and responsibilities of Co-founders
- Founder Agreements
- How to award equity to Co-founders
- How to appoint Co-founders to your board
Roles and responsibilities of co-founders
In the early stages of setting up a business, it is sometimes difficult to determine whether someone should be considered a co-founder, or just a founding employee. The differences between these two roles lie mainly in the extended responsibilities of a co-founder. Most importantly, when the time comes to do a Funding Round, your co-founder will be subject to the legal documents that need to be agreed with investors. Effectively, your co-founder makes representations to shareholders about the state of the business ( known as Warranties) which makes them liable if they mislead investors.
When you list someone as a Founder on SeedLegals, that will list that person in the definition of Founders in the Term Sheet and Shareholders Agreement for a later Funding Round.
We recommend that the only people you list as co-founders are those who have the majority of the shares (around 40% and over) and who are prepared to sign up to the personal Warranty liabilities in the funding round. You can also check out our guide on what separates founders from employees here.
Once you have chosen these individuals, it is time to put a Founder Agreement in place.
We recommend signing a Founder Agreement to set out the rights and responsibilities between each founder and the company. It also means that if someone decides to leave the business in the early stages, you’ll have a contract to turn to. Relationships with people may change, but contracts don’t.
First, add your new co-founder to the platform. You can do that by going to Settings, then the Users & Roles tab, and adding their name and email address. For a full guide on how to complete the above steps, check out this article on How to Add a User.
Depending on which stage your Company is at, we offer two different founder agreements - a Founder Pledge, and a Founder Service Agreement. You can create both documents in the Team section in SeedLegals, once you decide which one is best for you:
- Founders Pledge: A Founder Pledge is the way to go if your company is just starting out, and the founders generally aren't paid a salary. If that's your situation then when creating your founder agreement just set the salary to £0 and then we'll automatically omit everything related to salary and employment
- Founders Service Agreement: On the other hand, a Founder Service Agreement is typical when a company can afford to pay their founders which is usually around the time you raise investment (if you need any more information about that, have a look at our guide on Completing your First Funding Round).
For more detail on these agreements and for a step by step on how to set them up see our article that specifically addresses Founder Agreements.
Awarding equity to co-founders
The process of awarding equity to your co-founders may seem confusing and daunting but we’ll talk you through this below.
The first step would be to decide whether you want to give your co-founder Shares or Options.
- Shares: Awarding a co-founder with shares essentially translates to giving them a percentage of the company upfront, and the voting and information rights that come with it. Shares are usually put on a reverse vesting schedule: they belong to the person from the beginning, and then if they decide to leave during the vesting period they would need to transfer these shares back.
- Share Options: On the other hand, giving them options (to buy shares in the future) does not infer giving them any immediate rights, as options forward-vest. This means that the co-founder would start with no equity in the company upfront, but rather earn it over time. The options can then be exercised and converted into shares
When it comes to your wider team of employees, we usually recommend that you award them with options as transferring shares back in the event someone leaves is a complicated process. However, in the early days of the company, when a new co-founder joins, you would often want to give them equity directly, in the form of shares. See here for more information on How to give equity to your co-founders and team.
In most cases, and especially at an early stage when the company has not raised funds yet, the easiest and best way to give shares to your co-founder is to issue them new shares. Our share issue product means you can issue shares to your co-founders in under 15 minutes, so check out this article on How to Issue Shares!
Lastly in this section we will examine the concept of vesting. In simple terms vesting means that the shares or options are ‘earned’ over a period of time, and the person will own the full amount only when the full vesting period has passed. Both shares and options can vest, but they do so in very different ways.
- Shares are issued and allocated to the shareholder upfront, and then they reverse-vest. Therefore, if the shareholder then leaves the Company before the end of the vesting period, then they will be required to sell their unvested shares back to the company.
- Options, on the other hand, forward-vest. This means that the option holder is granted with options, and they get them over a period of time. If the person leaves the company before the end of the vesting schedule then the unvested options lapse.
If you want to explore vesting in more detail, check out our article on Shares and Option Vesting Explained
Specifically concerning co-founders, our Founder Agreements offer detailed provisions on share vesting. Importantly, both the Founder Pledge and Founder Service Agreement can establish a vesting schedule for your shares as founder and co-founder. This can be found under the Equity section of the Agreements. Here are some helpful tips on this:
- When determining what class of shares you are granting your co-founder, keep in mind that founders will usually have Ordinary shares with voting rights. Later-joining founders sometimes get non-voting shares, often labelled B Ordinary Shares.
- When considering what price per share to put, consider that usually the founders pay the nominal value of each share, but if they're granted shares later on they may need to pay something closer to the actual share price.
- When it comes to the way these shares will vest, we recommend vesting over a period of years. It makes things easier later on when you do a funding round because the investors will generally be expecting the founders' shares to vest over a period of 3-4 years rather than milestones.
- You can choose to set a certain amount of shares as already vested. This is useful if the founders have been working on the project for a long time, perhaps before the company was even incorporated. This way you can give them, say, 25% of their shares right away, with the balance then vesting over the course of the vesting period.
- You can also set a cliff period which is the time until the first set of shares vest. This provision is meant to protect already existing founders if a new one joins, or protect the company in the long term even between the original founders.
Adding your co-founder to the Board of Directors
After you have signed your Founder Agreement and awarded your co-founder with some equity, it’s likely that you will add them to your Board of Directors. For a step-by-step guide on how to do that, please check out our article on How to appoint a director.
You can find further information here on how to approve or terminate directors In addition, please see our article on the Board of Directors’s Roles and Responsibilities in Startups for more details on how the board of directors functions and what role it plays in start-ups.