Your co-founder can make or break your business. 

Giving serious thought to who you choose as a co-founder, and having well drafted contracts in place from the outset, is vital to the success of your enterprise.

In this article, we’ll explore what you should look for in a potential co-founder, as well as the key contracts you should use to protect your relationship. 

What Should You Look For in a Co-Founder?

There are many factors you should take into account when choosing a co-founder for your business. Let’s run through some of the key ones. 

Personality: You will be spending a lot of time with your co-founder/s, so you need to choose a co-founder whose personality does not annoy you! While you don’t have to be best friends, it’s important you get along and can communicate well. 

Ambition: The co-founder you choose should be able to take initiative, work independently, and have a matched ambition for the startup.

Work ethic: What if a co-founder is working way less than other co-founders, but is reaping the same equity or benefits? Not to mention the work that’s just not getting done, meaning other co-founders have to step up their hours. If you and your co-founder don’t have the same work ethic, it can be easy for the team to become resentful. You should choose a co-founder who is honest about the hours they expect to contribute. This conversation should be had very early on, before you decide on your equity split.

Different experience and skills: Choose a co-founder who can meaningfully contribute to an area of the startup you do not have the skills to contribute to. For example, you might have thought of the original idea of the startup, but do not have the technological ability to execute the idea.

How Much Equity To Give A Co-Founder

Before jumping to the conclusion of splitting equity evenly, it’s important to consider the following factors (even if it’s an awkward conversation!):

  • The amount of hours each co-founder will work on a regular basis
  • The relevant experience of each co-founder
  • The value each co-founder brings to the startup
  • Time commitment: how long the co-founder sees themselves staying in the start-up

Frank Demmler, an Associate Teaching Professor of Entrepreneurship, cautions against automatically dividing equity equally amongst co-founders and uses this graph as a guide to discussing equity to give each co-founder. In his words, co-founders should “consider the past, current, and future relative contributions of the founding team members to the ultimate success of the company.”

How To Have A Good Relationship With Your Co-Founder

Communication about all of the above with your co-founders is a necessary first step so that you all have a clear idea of what each co-founder’s expected contribution and role will be.

The next step should be to get all of that in writing!

If you’re entering into a partnership business structure, you will need a Partnership Agreement

If you’re setting up under a company structure, you will eventually need a legally binding Shareholders Agreement. Some startups can’t afford a Shareholders Agreement right away, or they have not finalised important decisions around who the directors and shareholders will be. In these cases, startups often use a Founders Term Sheet

A Founders Term Sheet is a useful tool to guide discussion around topics your co-founders might not have even thought of yet. Though it is not a legally binding document, it is an agreement to outline the key points of your relationship. 

A Founders Term Sheet will lay out each co-founder’s rights and responsibilities. It can be used in commercial discussions or with investors to show your business is organised and has given thought to future decisions affecting your company. This can increase investor’s confidence and lay the foundations for your Shareholders Agreement.

What’s Included In A Partnership Agreement And Shareholders Agreement?

While these documents will be drafted quite differently, both have a similar purpose: to be a formal, legally binding written document that will govern the relationship between co-founders. 

Think of these agreements as a tool to avoid future disputes, and as something to refer to should conflict or confusion arise down the track. 

Both agreements should be tailored to your business, but will generally address the following points:

  • How important decisions are made and who makes them
  • How disputes are resolved
  • How long co-founders are expected to stay
  • The course of action if a co-founder wants to leave
  • How profit and loss is distributed
  • Each co-founder’s roles and responsibilities

A Shareholders Agreement will also include:

  • How share are allocated
  • When shares can be issued and sold

While a Partnership Agreement will address:

  • The purpose of the partnership
  • How long the partnership is expected to run for

What To Take Away…

The importance of choosing a co-founder who fits your values and the values of your enterprise cannot be understated. 

After you’ve given careful consideration to choosing your co-founder, it’s vital that you contractualise your relationship with a Founders Term Sheet (and later a Shareholders Agreement), or with a Partnership Agreement. This ensures you’re all on the same page and helps avoid future disagreements.

Best of luck with choosing your co-founder! Don’t hesitate to reach out to our expert startup lawyers here at Sprintlaw on 1800 730 617 or for legal advice. We’re available for a free consultation any time.

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