Forming a Startup Part 1:Founders Collaboration Agreements

Founders Collaboration Agreement
Start-ups that go through the various stages of funding, become widely successful and then go public, and in the process earn the founders a whole lot of money, is every entrepreneur’s dream. This is the very foundation on which the Silicon Valley was built on, the same foundation upon which our very own silicon savannah has been conceptualized and the template influencing our Konza techno city.
However, aside from having the brilliant idea coupled with the technical know-how to create a scalable start-up, start-up founders may sometimes be clueless as to how to initiate the company and brand down the road to success. This article is the first in a series of articles looking to shed some light on how to start on the process, avoid pitfalls and increase attractiveness to investors.
There is an adage among lawyers that says “contracts are not for the happy days, they are for the rainy days.” Some may argue this is a ploy by lawyers to make money. However when disagreements arise, and often they will when the success and big money finally rolls in, see the Facebook story for example, then the contracts signed during the early days will come in handy.
The first step in the start-up process should always therefore be to clearly outline, in writing, the rights and responsibilities of the start-up founders, who is entitled to what. The first step should therefore be to draw up a founder collaboration agreement. This document would govern the interaction of the founders with regard to the start-up. This charts a clear path for the start-ups and avoids any blurred lines.
Importance of Founder Collaboration agreements
This agreement is important first for purposes of settling any disputes that may arise in the future regarding the start-up. Avoiding he said she said allegations is paramount for long term success. Such disagreements may be the barrier between the founders and that coveted IPO (which I must add is a highly regulated process).
A second reason is for purposes of raising funding from angel investors as well as venture capital firms. Venture capital firms in particular are very stringent in their requirements. Part of the legal due diligence that is carried out by venture capital firms is with regard to such agreements. It gives them an insight into the start-up, who is responsible for what, whose consent they have to acquire before they can be allowed to invest etc.
A third and very important function of the founder collaboration agreement is the fact that most of the time, the registration of the start-up as a legal entity i.e a company usually comes after the process of product development has begun. The problem with this scenario is therefore the question of intellectual property. Who owns the rights to the product developed and in what proportion? Since Venture capitalists will insist on any and all intellectual property to be vested in the company, it is important to outline in the collaboration agreement that once the company is set up then all the intellectual property rights automatically are transferred to the company.

Important clauses
1. Intellectual Property Rights
This clause should expressly indicate that once the incorporation of the company has been completed and a certificate of incorporation issued, that all intellectual property rights with regard to any product developed shall be the property of the company and not any individual founder. This is very important as VCs will generally not agree to invest if the property is vested in an individual.
If any of the founders are employees in any other organization, the founders with the help of a lawyer should ensure that any invention or product developed by that founder is not attributed to his employer. This is because most employment contracts provide that any invention by an employee in the course of their employment shall be owned by the employer. Ways of ensuring this with regard to the start-up product development should therefore be incorporated in the agreement.
2. Ownership structure of the company
The ownership of the company to be formed should be agreed upon beforehand. This includes how many shares each of the founders shall hold as well as the rights that will be attached to such shares such as voting rights.
A second important issue, one aimed at protecting the continued success of the company is the issue of vesting of the shares. This concept will be discussed in detail in a subsequent post. However the general concept is that once a founder is allocated shares he can only legally be considered to own them after a certain time period has lapsed. So if he leaves the company before this time period lapses he shall not be entitled to those shares. This ensures loyalty of the founders to the company. Most VCs and other investors insist on this provision since they are not only investing on the product they are also investing in the founders and their know-how.
3. Confidentiality
Confidentiality is an important factor for start-ups. You do not want any outsiders getting hold of any proprietary information. A binding obligation on the part of the founders ensuring confidentiality should therefore be in place. In this regard therefore, it should be incorporated in the agreement that any pitch to any potential investor must be by the consent (in writing) of all the founders.
4. Dispute Resolution
The court process in any part of the world, no less in Kenya, is an arduous process that could take years to resolve. By this time opportunities would have passed up the start-up and even its shelf life (especially in the fast paced world of technology) would be passed. It is therefore important to incorporate Alternative dispute resolution mechanisms.
With regard to a collaboration agreement, mediation should be the first option. However since the outcome of mediation is not per ser binding on the parties, Arbitration should be included as the award given by the arbitrator would be binding upon the parties.
While the above provisions are in no way exhaustive, they are some of the most basic and important factors to consider in the Founder collaboration agreement.

Disclaimer
The information provided above is meant for general information purposes and should not be construed as constituting legal advice or solicitation. The writer shall not be liable for any reliance on the above information. Kindly seek the advice of your legal counsel before entering any agreement.