HOW TO PROTECT YOUR COMPANY FROM DEAD WEIGHT CO-FOUNDERS

Are you about starting a company with a co-founder and you have concerns such as;

1. What if my co-founder doesn’t pull his/her weight and I need to find another co-founder?
2. What if I realize in the future that my co-founder isn’t the person I thought he/she was when I started the business?
3. What if he/she gets bored with the business idea? OR

Have you ever had your company shut down because your co-founder either fails to perform the responsibilities assigned to him/her and in addition you discovered that such a co-founder is still entitled to benefits from the company?
Believe it or not, these concerns have been the death of many promising ventures in Nigeria and around the globe. But in these times when partnerships are regarded as essential to business growth; do we discard the idea of co-founders entirely? Or is there something we aren’t doing right?

Below is our recommendation for startup founders when faced with such situations. Please note that these points are restricted to companies with share capital only.
Before your company is formed;

1. Have a clear assessment of what all founders are bringing to the table. It could be financial contributions, sweat equity or both. Whichever is the case, ensure that a final equity contribution of all co-founders is calculated and spelt out.
There is a way to calculate such contributions in a manner that ensures that each founder arrives at what is fair. Ensure you seek professional help while calculating equity contributions.

You may reach out to us if you need professional guidance in this regard.

2. Define in clear and precise terms, the duties all co-founders are expected to perform on behalf of the company, once operation commences.

3. More importantly, ensure you come to a mutual understanding with your co-founder(s) that rights to company shares will be earned as time passes and or the latter meets certain milestones/responsibilities. This concept is called ‘Vesting’ and is lawfully recognized in Nigeria, so long as there’s a valid contract to that effect.

4. Finally, verify the terms of your agreement (especially as regards vesting) in writing by having your lawyer, who has a firm understanding of shareholder equity, prepare a well-drafted founders’ agreement. I assure you, that this is different from your regular company incorporation documents.

HAS THIS STRATEGY WORKED BEFORE?
Ever heard of the dispute between Facebook’s co-founders Mark Zuckerberg and Eduardo Savarine? The facts of the story may vary, but the undisputed point is that Mark Zuckerberg was able to solve his complicated ownership case through a vesting agreement. I hope I’ve done justice to this topic, but if you need clarity feel free to ask your questions privately or in the comment section.

If you need guidance with calculating your equity contributions or setting up a company with a co-founder or co-founder(s), you may reach out to us HERE, and we look forward to hearing from you.

Cynthia Tishion
Cynthia is a lawyer and currently serves as Head of Corporate / Commercial Services at LEX – PRAXIS. With her passion for business and entrepreneurship, she is actively engaged in creating awareness on the legal aspect of businesses through various platforms such as writing, public speaking engagements.

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