Are there any Rules and Regulations for a cofounder?

Ravi Sharma Looking for a co founder

Last updated on April 8th, 2018

I am an aspiring entrepreneur and want to understand the rules and regulations of working with a cofounder. Are there any rules we can refer to while managing the issue of shares, profit, salary, roles and responsibilities etc? If yes where can I find it?

Shaun Lindbergh Founder and CEO MOBILISE!, a community network.

April 10th, 2018

There are no rules as such, you write your own. These rules can be included in your articles of association.

I am writing a series of articles on LinkedIn about finding partners for a venture; you can see the first article here.

I hope you find that helpful

Marian M

April 11th, 2018

I am suffering from a major lack of space answering this question in full, but here are 5 points that come to my mind:

1. Assign clear responsibilities to each founder

You don´t need to agree on every single decision that is to be made. Establish clear functional responsibilities and a reporting system (don´t forget the KPIs). I am not saying that you shouldn´t discuss issues, but sooner or later the person in charge must take the lead and make the decision. I have seen too many start-ups failing because major decisions were not made at all which causes a lot of frustration.

2. Patents / Licences / Intellectual Property

Make sure that all IP belongs to the company rather than to one or more single founders. That´s sometimes an issue when one brings in a patent or an MVP. The same applies to domain names, picture rights and the like.

3. Dividing equity

What you have agreed upon in the two points above will certainly influence the division of ownership. Whatever it is, do not start the company before everyone feels absolutely fine with the division of ownership. If there are issues later about that it will hurt the company. Needless to say that equity must not necessarily be divided equally among founders, and how you do that is as delicate as individual As a rule of thumb you may apply what is called the Cambridge Method of dividing equity. I would offer an Excel template for free about that but haven´t yet found out how one can upload such a file here on cofounderslab (if this is possible at all).

4. Vesting and cliffs

Absolutely critical is that all shares have to be vested (including yours). Some advisors tell that vesting periods are around 4 years on average, but we have all seen that nothing in life is so rare than the average. Again this is highly individual. Cliffs are possible.

One note with respect to vesting: Make sure you define in your terms what a “bad leaver” is (which in turn makes everyone else a good leaver). Do not define what a good leaver is (thus making everyone else a bad leaver). It makes life easier later when one really has to leave the company. (If you have never heard these terms search them on the web, I´ll be glad to answer questions here if any queries arise).

When dividing equity think also that you will need some shares for option programmes (e.g. ESOP, non-executives, etc.)

5. Let a lawyer see your final agreement

This holds especially true if you have founders in more than one country. Relevant legislations are different. I have already seen founding teams arguing after some time about what they have agreed upon, and sometimes they were even unsure whether they have reached an agreement at all.

Go to a lawyer that has structured and negotiated such deals (ask for references). Yes, this maybe a bit of money, but it pays off later.

In addition, you may have an advisor that can explain the business implications of the legal terms. This does not necessarily cost a lot. Depending on what you need it may be for free. I personally do that over a coffee sometimes, and you may find someone in your town, too.

Hope that helps.