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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 within New Zealand’s legal framework.
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 it’s crucial to choose someone whose personality complements yours. While you don’t have to be best friends, effective communication and a good working relationship are essential.
Ambition: The co-founder you choose should share your vision for the startup and be proactive in driving the business forward.
Work ethic: It’s important that all co-founders contribute equally to the business in terms of time and effort. Discrepancies in work ethic can lead to resentment and imbalance within the team. Discuss expectations early on to ensure alignment.
Different experience and skills: It’s beneficial to partner with a co-founder who brings a skill set to the table that you may lack, complementing your abilities and contributing to the startup’s success.
How Much Equity To Give A Co-Founder
Before deciding on an equity split, consider the following factors, which can sometimes be uncomfortable to discuss:
- The amount of hours each co-founder will work regularly
- The relevant experience of each co-founder
- The value each co-founder brings to the startup
- Time commitment: the expected duration of each co-founder’s involvement in the startup
Equity should reflect the past, present, and future contributions of each co-founder to the company’s success. It’s important to have these discussions openly and to document the agreed terms.
How To Have A Good Relationship With Your Co-Founder
Clear communication about roles, contributions, and expectations is the foundation of a strong co-founder relationship.
The next step is to formalise this understanding in writing.
If you’re entering into a partnership business structure in New Zealand, you will need a Partnership Agreement.
If you’re setting up a company, you will need a legally binding Shareholders Agreement. Startups that are not yet ready for a Shareholders Agreement or are still finalising their director and shareholder structure may begin with a Founders Term Sheet.
A Founders Term Sheet is a preliminary document that outlines the key aspects of the co-founders’ relationship. While not legally binding, it serves as a precursor to a Shareholders Agreement and demonstrates to potential investors that your business is well-organised and forward-thinking.
What’s Included In A Partnership Agreement And Shareholders Agreement?
Both documents serve to formalise the relationship between co-founders and prevent future disputes by providing clear guidelines for the business’s operation.
Typically, these agreements will cover:
- Decision-making processes and authority
- Dispute resolution mechanisms
- Duration of co-founders’ commitments
- Procedures if a co-founder wishes to exit
- Distribution of profits and losses
- Roles and responsibilities of each co-founder
A Shareholders Agreement will also detail:
- Share allocation and transfer conditions
While a Partnership Agreement will include:
- The objectives of the partnership
- The expected duration of the partnership
What To Take Away…
The significance of selecting a co-founder who aligns with your personal values and the goals of your business cannot be overstated.
Once you have carefully chosen your co-founder, it’s crucial to formalise your relationship with a Founders Term Sheet and, subsequently, a Shareholders or Partnership Agreement. This ensures clarity and helps to prevent future conflicts.
Best of luck with choosing your co-founder! Don’t hesitate to reach out to our expert startup lawyers here at Sprintlaw on 0800 002 184 or [email protected] for legal advice. We’re available for a free consultation any time.
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