⚡TL;DR
- This is an agreement between the founders prior to the incorporation.
- Having such an agreement forces important conversations, especially around the equity split.
- Make sure that all co-founder IP is actually transferred and assigned to the future company, even if one of the co-founders leaves before incorporation.
- Generate a free founder collaboration agreement on our website.
- Book a free call with us.
What is it, and why is it important?
Before you incorporate your company, it’s a good idea to have a written contract that outlines your rights and obligations as you work on the project.
This ensures that the co-founders are aligned on the next steps. In particular, it forces co-founders to have important conversations in preparation for future incorporation, for example, regarding the equity split.
A founder collaboration agreement also serves as a basis for preparing the company’s future shareholders’ agreement, which will be drawn up after incorporation.
The fact of entering into a formal written agreement also serves as a psychological commitment that makes the venture “official“.
What must be included in a founder collaboration agreement?
- An equity split (see below), meaning an agreement on the future share distribution of the company to be incorporated.
- An agreement on the future incorporation of a GmbH/Sàrl or AG/SA.
- An agreement on which founders will be elected to the board of directors (Switzerland) or will be appointed as managing directors (Germany) of the future company.
- An agreement regarding the IP, ensuring that all IP created by the founders will be assigned, transferred, or licensed to the company.
- A description of the business or purpose that will serve as a goal for the founders.
- A mechanism for how decisions will be made.
- A clause regarding liability and whether such liability will be individual or joint (Note: in Germany, only for internal recourse; towards third parties partners in a GbR are personally, jointly, and severally liable by law).
- A clause regarding expenses, gains and losses and how such costs will be split between the founders until incorporation.
Best practices
Co-founder agreement: If there is more than one founder, a co-founder agreement is in place before the incorporation of the company.
Equity split: The equity split (i.e., how many shares will each founder get after incorporation) is discussed with solid rationale (e.g., cash invested, pre-incorporation working hours, IP contributions, etc.) and agreed upon in writing.
Expenses, profits, and losses: It is determined whether the expenses, profits, and losses will be shared equally, based on the equity split, or in some other way.
Pre-incorporation IP: An assignment or license of all IP created in the course of the collaboration to the future company without any compensation is agreed.
Free generator: Our standard founder collaboration agreement can be generated for free here.
What is the equity split?
Talking about equity allocation is always an uncomfortable discussion. But it is important to have this discussion as early as possible.
- Be aware of the cognitive biases:
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- “I do more than others”: In a flat-sharing community, everyone thinks they do the dishes more than anyone else. The same goes for people who think they contribute more to a startup than others.
-
- Optimize for fairness, not pie size: It’s better to have 1% of a big pie than 100% of a crumb.
-
- Avoid conflict: Even if it’s uncomfortable and leads to conflict, it’s better to have the conflict now (and realize that you may not be a suitable team) than later.
- Investors will ask about the reasons for the split: Remember that you need to be able to defend the equity split among the founders to investors.
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- Why do all founders have the same number of shares?
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- Why does one founder have a small number of shares?
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- Relevant elements for the split are notably pre-incorporation working hours, invested capital and contributed IP – here’s an example:
|
Founder |
Labour |
Capital |
IP |
Total |
Share % |
|
Alice (junior developer, works 100%, ‘had the idea’ and wrote the code of the prototype) |
350’000 |
0 |
100’000 |
450’000 |
45% |
|
Bob (three prior exits, work 10% as advisor, brings seed capital and network) |
50’000 |
50’000 |
50’000 |
150’000 |
15% |
|
Eve (junior developer, works 100%, helped with the code for the prototype) |
350’000 |
0 |
50’000 |
400’000 |
40% |
- There are many resources available online to help you get started. One solution is to:
-
- Start a spreadsheet with work performed and money invested.
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- After a certain period of time, split the pie (i.e., split 100% of the total equity) according to this logic (time x hourly rate + money x factor) / (contributions of all co-founders).
- Be aware of the tax implications:
-
- An equity split after the company is already incorporated can lead to unwanted tax consequences for the founders.
-
- Shares transferred between founders may no longer qualify as “founder shares” for tax purposes.
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- Depending on the Canton in which the respective founder lives, a ‘re-allocation’ of shares is possible within 6-12 months after incorporation, provided the company is not yet cash flow positive.
How do I get this done?
Generate a free founder collaboration agreement on our website.
Book a free call with us.
Read more on the LEXR Blog
https://www.lexr.com/en-ch/blog/co-founder-share-splits-for-startups-slicing-the-pie/