How to Create the Perfect Cofounder Agreement with Your Business Partner


You’ve just conceived a brilliant billion dollar startup idea; you’ve defined the perfect value proposition for you company; and you just met the perfect cofounder (or cofounders) to help you get your idea off the ground.

You’re ready to launch a startup, right?

Not quite. If you plan on starting a business with others, it’s imperative that you all set aside some time to discuss and work out a cofounder agreement. You may get along wonderfully at the outset, but as your company grows and expands, you may discover that you have differences regarding the future of your startup or its mission. And when these differences arise while the company is operating, this will only compound problems.

However, we’ve gathered the best opinions from top startup experts to help ensure that you and your partner align your goals and establish a strong cofounder relationship for your company.

How to Ensure Alignment of Vision

As you and your cofounder (or cofounders) embark on your entrepreneurial journey together, it’s imperative that you all share the same vision for the purpose and future of your company. It’s easy to get caught up in the thrill of launching a potentially successful startup together, but you all must take the time to establish the existential foundations of the company, and as early as possible, to help prevent the possibility of a drastic falling out later on.

In the guest blog post “8 Issues You Need to Discuss with Your Co-Founder” on CoFoundersLab, David Ehrenberg (CEO of Early Growth Financial Services) outlines several concerns that cofounders must address before launching a company together. Below are some of the most important ones, organized by topic:

What Are Your Goals?

What Are Your Company Values and Philosophy?

How Do You Measure Success?

Working Styles and Culture

Once you and your cofounder have laid down the aspirational and philosophical groundwork for your startup, this is also the ideal time to determine what kind of working environment best complements the vision of your startup.

In the FounderDating blog post, “34 Questions to Ask a Potential Co-Founder”, Jessica Alter (Founder and CEO of FounderDating) lists the questions you should ask your cofounder to define your ideal working conditions for your company.

  1. What 3 words best describe the startup culture you want to create (e.g. open, hard-working, eccentric, etc.)? Pro-tip: If you’re really serious and far along go visit few office spaces together to get a sense of what each of you likes work environments wise and why.

  2. What values do we want to instill in our employees?

  3. If you could pick 2 things to change about our company, and two things to bring with you from your previous experience, what would they be and why?

  4. How much equity are we allocating for future employees?

  5. What should we look for in our first 5 hires?

  6. Describe your ideal working style.

How to Determine Roles

Once you and your founding team have settled on the overall scope and mission of your company, take the time to define your respective roles and which team member will oversee what. While the functions of formal roles tend to change (especially for recently established startups), the Steve Robbins-penned Entrepreneur article, “Build Your Management Team”, outlines the general functions of each formal role. The definitions below should help you get started picking your respective roles:

Chief Executive Officer (CEO)

Chief Operating Officer (COO)

Chief Financial Officer (CFO)

President

Chief Marketing Officer (CMO)

Chief Technology Officer (CTO)

Legal Decisions & Definitions

Most founders who set out to launch tech companies have little to no legal experience, which can lead to problems down the road, especially when investors and lawyers get involved. While entrepreneurs aren’t required become legal experts to build companies, taking the time to become with basic legal practices can only benefit one’s company. To get you started below are several elementary legal questions you and your cofounder should address, taken from the Forbes article, “10 Big Legal Mistakes Made By Startups”, by Richard Harroch.

General Questions

Basic Legal Definitions

Harroch's article also explores numerous basic legal terms associated with launching a startup, all of which you and your business partner should familiarize yourselves with.

Now let’s take a look at a couple more advanced startup legal topics that you should address when launching a company with others. In “Common Legal Mistakes Made by Startups (And How You Can Avoid Them)”, Matt Glick of Legal Hero expounds on the requirements for establishing a solid legal foundation for a startup.

Include a Vesting Schedule When Issuing Shares to Co-founders

Protect Your Valuable Intellectual Property

How to Split Equity

And now for the part you’ve all been waiting for: how to split equity among cofounders. While it may easy to merely assume that splitting equity equally between cofounders is the way to go, once you start delving into into who brings what to the company, you’ll discover that “equal share” doesn’t add up to “fair share”. Just ask Dan Shapiro, CEO of Glowforge and Founder Institute Mentor. In his GeekWire article, “The only wrong answer is 50/50: Calculating the co-founder equity split”, Dan posits that equity share should be calculated from the founder’s worth. Here’s what Dan has to say on determining equity share from what each founder contributes:

Ideas are Valuable

That First Step is a Doozy

Full Time Commitment is Expensive

The CEO Gets More. Always.

Reputation Counts

If you want more information on such a sensitive topic, check out our previous blog posts on the matter:

And as a bonus, be sure to download the Co-Founder Equity Split Spreadsheet has 5 different calculators in it, and a final box that averages everything out among all five.

Final Thoughts

Yes, talking about such topics as company roles and vision and equity and the like can be uncomfortable among founders. However, these discussions are vital to a successful partnership, as well as a successful startup, and must be held before any of you invest too much time, energy, and money into a potential company. Keep in mind that whoever you decide to launch a company with, you all will have to make countless difficult decisions once your company is actually up and running. If you take nothing else from this blog post, at least follow the bit of advice below:

Do you want more expert entrepreneurial advice? Attend a free startup event or sign up for the Founder Insight newsletter.

(Business team with hands together - teamwork concepts image by Shutterstock)

How to Create the Perfect Cofounder Agreement with Your Business Partner

By Joe Garza

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