co-founder agreement – short form

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This is a short form co-founder agreement intended for use by the founders of a new startup who wish to provide for some level of claw-back of a co-founder’s initial shareholding if he or she ceases to work for the company (whether as an employee or contractor).  In this document, the company’s right to purchase shares is limited to a situation where the co-founder ceases to work for the company, i.e. there is no expected contribution from the co-founder.  If you would like the company to be able to repurchase shares for a failure by the co-founder to contribute to the company, use the long form of this document on our website instead.

This type of arrangement is referred to in the startup and venture capital world as “founder vesting”.

Founder vesting is common with Silicon Valley startups, and is becoming more popular in New Zealand as co-founders are increasingly meeting through incubators or accelerator programmes rather than through longstanding business, professional or social relationships.

The approach taken in this document is to provide for progressive vesting of a co-founder’s shares over a set period (e.g. 36 months).  If the co-founder leaves the company during that period, the company has the option to repurchase unvested shares for the price originally paid by the co-founder for those shares (which will usually be nil, if the shares were issued on incorporation of the company).

There are a number of important health warnings that go with the use of founder vesting arrangements in New Zealand, and to the use of this document in particular:

  • founders wishing to set up a vesting arrangement must obtain tax advice on the proposed arrangement before using this document.  In some circumstances, the implementation of vesting arrangements in New Zealand companies may give rise to tax liabilities
  • founders need to think carefully about the percentage of each co-founder’s shares that are subject to vesting, and about the overall vesting period.  The forced sale of shares is a blunt instrument, and could result in harsh outcomes if you get the percentage and/or vesting period wrong
  • the vesting provisions in this document are administered by the board of the company.  This may not work where there is an even number of directors on the board, as a majority vote of directors will be required for any actions taken by the company under this document.  This is likely to be a particular problem for startups owned 50/50 by two co-founders, and an amended version of this document is probably required in those circumstances
  • similarly, this document may not be acceptable to a co-founder who holds more than 50% of the company or otherwise controls the board.  A majority owner of a startup may not wish to be subject to any form of vesting arrangement and may want this to only apply to his or her minority co-founders
  • while vesting can be an equitable way to manage the comings and goings of co-founders in the early stages of a venture, we think founders should think carefully about whether the original vesting arrangements should continue once a company is ready to raise capital from professional investors.  If investors require some element of founder vesting to ensure the commitment of the co-founders to the company, it may be appropriate to agree a new vesting schedule and an updated purchase price.

Founders using this document will need to ensure that their company’s constitution expressly permits share buy backs (see the Simmonds Stewart template constitution, which expressly permits share buy backs, on the doc makers page on our website).

This document is not intended to cover broader matters relating to the management and governance of the company, and the relationship between its shareholders (e.g. the right to appoint directors, matters requiring special approvals, non-competes, etc.).  Those matters are more often covered in a shareholders’ agreement (see the templates page on our website).

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