Collaboration and Ownership: Legal Insights for Co-Founding Teams

You've dreamed of starting your own business and have found an interested co-founder. Now, you must create the rules and standards for success. While contracts aren't the most exciting part of a startup, they are necessary to protect all parties. Here's everything you should know about co-founding teams, and legal considerations for equitable collaboration and ownership.

In today's startup culture, it's women's time to shine. According to TechReport, 47% of women started businesses in 2022 — 3% more than men. And what could be better than going solo in your business venture?

Studies show startups with two co-founders raise 30% more money than those with only one. However, all parties' skills, traits and personalities must gel to thrive. A strong co-founding team is based on the following:

While no co-founding team is perfect, working with someone you respect and trust is essential for your endeavor to succeed.

Establishing a legal framework for collaboration and ownership of a startup is crucial for several reasons. For one thing, legal agreements protect all parties involved should something go awry, serving as a blueprint for a secure business relationship.

With a legal framework, collaborators understand their position, expectations, and the other person's roles and contributions. It also spells out how co-founders split the enterprise, ensuring everyone knows their equitable stake.

Legal foundations benefit your startup by establishing leadership, decision-making and problem-solving processes. For instance, all parties should sign an agreement to resolve disputes fairly. If they cannot do so unassisted, a mediator may be necessary.

Startups with a legal framework are also more attractive to investors looking for a trustworthy partnership. With a clear distinction of structures and processes, investors may perceive less risk, raising a startup's chances of securing funding.

Setting legal procedures and agreements around your brand isn't meant to hinder creativity and innovation. Instead, it should deliver peace of mind to the co-founders for a smoother, non-conflicting startup venture.

Understanding the importance of a legal foundation is one thing, but putting it together is another. If you want your co-ownership to work, you must start with legalities. Here are a few crucial aspects to consider.

A partnership or co-founders agreement is the first document you should write up and sign, detailing everyone's responsibilities, expertise and ownership breakdown. It should also define voting rules and conflict resolution.

Contracts must include clauses regarding payment, buyouts and exiting, too. For example, if someone isn't paid within 30 to 60 days, there should be a set of agreed-upon procedures they can follow to ensure they get their dues. What happens if one party decides to leave the startup? A legal contract should always touch on confidentiality to prevent the unauthorized spread of sensitive information after parting ways.

Open and honest communication is a cornerstone of decision-making and approval rights in collaborative ownership. As such, the co-founders must ensure transparent information delivery without hidden agendas.

Additionally, parties should freely provide their input without fear of judgment or retaliation, and work collaboratively to reach unanimity on the most critical matters. In return, there will be better communication, less misunderstanding, improved trust and more effective problem-solving.

If you're going into business with someone, you'll want to establish equity ownership — everyone's rightful stake in the startup. Equity distribution depends on leadership, standards, industry and how many stakeholders there are, which could vary over time.

Unlike sole proprietorships, co-founding teams must conduct candid conversations about splitting equity early in their venture. Risk, commitment levels and innovation should factor into this decision.

For instance, if someone is investing more money in the firm or left their previous job to focus on launching the startup, they might earn more equity than their co-founder. If another contributes unique skill sets or devotes more time to ensuring success, they might also receive a more significant share.

You could also offer equity to employees as you expand and hire talent. Frequently, co-founders deliver a four-year vesting schedule after one year of working at the company — meaning employees may own a portion of the business, vesting monthly or quarterly.

Anything your startup produces within working hours — products, marketing materials, ideas and designs — should be deemed intellectual property (IP). Some startups include anything created on a corporate computer or phone IP, too.

IP legal agreements set the stage for potentially selling IP, from decision-making to capital distribution from the sale. Co-founders should consider signing a legal agreement regarding IP as part of their plan to work out these details in advance.

Co-founding teams deliver exciting opportunities for everyone involved. However, despite establishing legal frameworks, collaborators may hit roadblocks — some of which may hamper success. These obstacles include the following:

A robust legal framework may not be able to resolve all hurdles, but it can smooth over many business facets. The rest is up to the co-founders to work out equitably.

If you're launching a startup with someone, set the legal foundation for your enterprise first. Lawful agreements in collaboration and ownership are your best chance of achieving all your goals.