Introduction to Private Company
A private company is typically one in which the shares are not made available for public sale and are privately owned by the founder or co-founders. Additionally, a private corporation may operate under legal requirements that are less stringent than those applicable to public limited companies.
Who is the Founder?
A founder is an individual who originates and conceptualizes an idea for a business venture, either to launch it on their own or in collaboration with other co-founders. The concept or idea can pertain to either for-profit or non-profit endeavours. What distinguishes a founder is not just conceiving the idea but also actively and materially executing that idea to establish the foundation of the business or organization. A founder is the driving force behind turning a concept into a tangible reality.
Who is a Co-Founder?
A co-founder is an individual who collaborates with the founder or founders to bring an idea or concept to life. A founder doesn’t necessarily work alone, and the idea may not always be solely their creation. In some cases, an idea may be jointly conceived by two or more people, or after the initial idea is formed, the founder may seek additional individuals with specific skills or expertise who share the vision and are willing to contribute equally to turn the idea into a reality. A co-founder is actively engaged with others in materializing and realizing the idea, sharing in the responsibilities and efforts of building the venture.
Bringing in a New Co-Founder:
When a private company is initially established by a founder or a small group of co-founders, a need may arise to strengthen the core team by welcoming a new co-founder. This addition is often driven by the desire to enhance and organize the company’s operations. The company may seek to recruit this new co-founder due to their specialized professional expertise that could benefit the organization. There might also be instances where a co-founder position becomes vacant for various reasons. In any of these scenarios, a private company can recruit a new co-founder by formally agreeing with the individual they wish to bring on board. This agreement, known as a “Co-Founders Agreement,” outlines key details such as the ownership percentage, control, and management arrangements.
Before entering into a Co-Founders Agreement and recruiting a new co-founder, several critical factors should be considered:
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Review of Articles and Memorandum of Association:
In the case of a registered company, the existing Articles and Memorandum of Association must be carefully examined. These documents outline the company’s structure, purpose, and internal governance. It’s essential to check whether these documents grant the company the authority and flexibility to induct a new co-founder. If such authority is not explicitly stated, an amendment to these documents may be required to facilitate the recruitment of a new co-founder.
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Co-Founders Recruitment Clause:
The original Co-Founders Agreement may include a specific clause that addresses co-founders’ recruitment. This clause could outline the rights, duties, and the process for inducting a new co-founder. Reviewing this clause to understand any pre-established procedures or requirements for bringing in new co-founders is important.
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Pre-Decided Procedures and Criteria:
Private companies may have predetermined procedures, criteria, or even a panel to decide when and how to recruit a new co-founder. These procedures are often implemented to ensure the decision-making process is structured and objective. The criteria might involve assessing the skills, experience, or resources a potential co-founder brings to the company. The panel could consist of existing founders, advisors, or key stakeholders who participate in the selection process.
In summary, when considering the addition of a new co-founder, a private company should first assess the legal and governance aspects, such as the Articles and Memorandum of Association and existing agreements. Additionally, they should know any pre-established procedures or criteria that guide the recruitment process. This thorough review and planning can help ensure a smooth and well-regulated transition when bringing in a new co-founder.
Co-Founders Agreement
A co-founder’s agreement primarily governs the professional relationship between individuals who initiate a new business or seek to bring their ideas into reality. The main objective of this agreement is to formalize the company’s operations, define the co-founders’ roles and obligations, and legally bind them through a written contract. Within this agreement, co-founders must establish clear business terms, address investment and resource considerations, and maintain transparency. It covers critical factors such as the company’s future objectives, the time commitment expected from each co-founder, the distribution of responsibilities, and the agreed-upon profit-sharing ratio. Ultimately, this agreement aims to prevent disputes within the business and protect essential aspects of the company, facilitating open discussions among partners regarding operational matters when needed.
A co-founder’s agreement should include the following essential components:
Business Definition and Milestones:
Clearly defining the business and its milestones is crucial. This section should provide a detailed explanation of the company’s potential venture and establish specific business terms. This clarity is essential to prevent existing co-founders from using the brand name or engaging in competing businesses. Additionally, it may mention specific milestones that will determine the future potential and direction of the business idea. This sets a clear roadmap for the company’s growth and development.
1. Equity Distribution:
This section addresses the allocation of equity and the percentage of shares each co-founder owns. It considers the contributions made by each co-founder, both in terms of their efforts and capital. The agreement can determine equity distribution through methods like:
Rule of N: Equal distribution among co-founders.
Contribution-Based: Distribution based on individual efforts and capital contributions.
Vesting: Allocation of shares and the right to repurchase shares.
2. Dis-Ownership and Departure:
In the event of a founder’s departure, the agreement should explicitly outline the departing founder’s rights and the conditions under which they can sell their shares. Clarity in this area is essential to avoid disputes and smooth transition.
3. Profit Distribution:
To preempt conflicts over profit distribution, the agreement should provide clear and specific guidelines for dividing profits among the co-founders.
4. Responsibilities and Roles:
The roles and responsibilities of each co-founder must be explicitly defined to avoid potential disputes. The agreement should outline the extent of these roles and offer flexibility for redefining them at different stages if necessary.
5. Termination and Firing:
The agreement should specify the circumstances and procedures for terminating or removing a co-founder. This is a crucial issue that, if not addressed, can lead to disputes in the future.
6. Decision-Making:
The co-founder agreement should clearly state how decisions will be made and what decision-making processes will be followed to prevent disputes arising from abstract decision-making situations during business development.
Including these components in the co-founder’s agreement ensures that important aspects of the co-founder relationship and business operations are well-defined, reducing the likelihood of conflicts and disputes in the future.
Steps Involved in adding a New Co-Founder to your Private Limited Company
Including a new co-founder requires more than just signing a co-founder’s agreement; it must include every part of the induction procedure, including share issuance and intellectual property transfer. A Co-Founders Agreement is a set of contracts that governs all concerns and is often signed as distinct legal documents for each problem.
The founders receive shares when a firm is incorporated. Similarly, shares must be given to new co-founders as they are introduced. This can be done in several ways, such as the firm issuing additional shares to the new co-founder at fair market value or the current founders selling part of their shares to the existing co-founder. Therefore, the new co-founder signs a restricted stock purchase agreement, granting the business the right of first refusal in case of a proposed share transfer or any other pertinent circumstance.
Managing intellectual property (IP) assignments and related documents is critical when bringing on a new co-founder for your business. Ensure that the entity, not the specific inventors, owns all intellectual property created for your business. Co-founders, staff members, consultants, and independent contractors are all affected.
The fundamental idea behind adding a new co-founder entails issuing “Founders Stock” and following all applicable legal requirements. Founders Stock can refer to any shares allotted to the new founder and need not be a particular kind of stock.
An extensive co-founders agreement that includes non-compete and confidentiality terms is necessary to safeguard the company’s interests. Alignment among current founders and directors is necessary before a new founder is incorporated. A specific share-purchase agreement, either between the new founder and the firm or between the current shareholders and the new founder, should be used to legalize the issuing of shares to the new co-founder. This thorough procedure ensures fresh talent is seamlessly integrated into the business.
Conclusion
Kanakkupillai provides expert guidance on legal matters, including co-founder agreements and intellectual property issues, to safeguard businesses while adding new co-founders.
