Co-Founder Agreement

This document is intended for use by the founders of a new start up 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); or
• fails to make the contribution required of them to the business.

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 Kenya 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. 48 months).  If the co-founder leaves the company or fails to make the required contribution to the business 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 for the use of vesting and clawback arrangements generally, and for the use of this document in particular:

• advisors should obtain tax advice on the proposed arrangement before using this document. The implementation of vesting arrangements may give rise to tax liabilities
• the parties should think carefully about the % of the advisor’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 % and/or vesting period wrong
• the right to repurchase shares for a failure to make the expected contribution, as provided in this document, is particularly blunt, given that whether or not a co-founder is pulling their weight can be quite subjective.
• the vesting provisions in this document are administered by the Board. 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 start ups owned 50/50 by two co-founders, and an amended version of this document is probably required in those circumstances
• similarly, this document is not likely to work well if the co-founder entering into it owns more than 50% of the company or otherwise controls the Board.
• 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.
• there may be certain restrictions on share repurchases under company law. A company may need express authority under its constitution for any share repurchases. A share buy-back agreement may be required, and sometimes there are limits on the number of shares that can be repurchased in any specified period.

Your lawyer or company secretary will need to complete any necessary board and/or shareholder resolutions needed to implement this document.

You should obtain tax and accounting advice before adopting this document.

This document should be used in conjunction with company governance documents (e.g. constitution and/or shareholders’ agreement) that adequately deal with small minority shareholdings, including pre-emptive rights on share transfers and drag along.

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