25 Crucial Questions for Co-Founders
(Before Starting a Business or Creating a Founder’s Agreement)
If you’re reading this, then you’re probably looking for a co-founder, or found one and want to finalize his or her joining the startup. In any case, I know it’s not easy. You have to find someone you like, someone who sees your vision, who likes your startup and who has the time and skills to help you and the startup succeed. That’s a long check-list to cover. Now add to that the discussions about personal compatibility, business aspects and then the cherry on top: legal aspects, and it becomes overwhelming.
That’s exactly why I created this blog post.
How to use this document?
In real life, you need to first get to know your potential co-founder, then talk about business aspects and then cover legal aspects. This document has the same flow: there are 3 sections:
- Section 1: Getting to know your potential co-founder.
- Section 2: Business Topics to discuss.
- Section 3: Legal Topics to discuss.
Relationship Questions
When starting to work with a co-founder, it’s not only important to agree on the commercial/legal aspects, but equally important to make sure that you have a good personal connection. The below questions will help you with this.
Note: you don’t want to scare co-founders away, so don’t just send them a questionnaire. Instead, start by introducing yourself/the startup and sharing your vision. Then move on to the questions.
- Why do you want to join this venture?
- How do you prefer to communicate (email, WhatsApp, messages, Video-calls)? Also, do you prefer people who are direct or more formal/polite?
- What is ‘superpower’? What is your Kryptonite? How do these affect the startup?
- How do you handle conflicts and personal disagreements?
- How are you at getting feedback?
- Do you have any personal limitations that might prevent you from succeeding with the venture?
- What is your decision-making style? Do you prefer consensus or decisive action?
- What are your expectations from me? What advice can you give me for working with you?
- What are your biggest fears or concerns about starting this venture or our work together?
- What would you consider deal-breakers in this partnership?
Business Questions
Questions ordered from the more general (‘light’ topics) to the more serious/important topics.
- How much time each month will you be able to commit?
[Note: this can – and should – change once you raise funding and have enough to pay salaries] - How do you see our roles in the business?
[Titles + description of responsibilities] - How do you see us covering the startup’s expenses?
[For example, are expenses split equally? Or according to the equity split: if it’s a 60%-40% split, then one founder would pay 60% of the expenses and the other 40%] - Who decides/approves expenses?
[For example, you can agree that you both need to agree to any expense (in advance), or that each of you (on their own) can approve expenses of $300 (per expense) up to $2,000 in total per month and that anything above these amounts require mutual approval] - How will profits be reinvested or distributed among founders?
[For example, some founders insist that all or most of the profits are re-invested in the business] - Management of the bank account: do both of you have access to the account? Can you both transfer money? If so, do you need two signatures for any transfer or only above certain amounts?
[Consider that if one signature is enough, then a co-founder could potentially make many small payments which accumulate to a big payment.] - Are you aware that if we raise money from investors your shares will be diluted? [semi legal]. Important that founders make sure that this is understood and accepted by all.
Legal Questions
Below are some (not all), of the legal issues that you need to cover. Some of them are not easy to understand if you don’t have some legal/startup background. I’ve tried to add simple explanations, but don’t feel bad if some things are still not 100% clear – that is why you should have a startup lawyer help you avoid making critical mistakes. I have another blog post about “Everything you need to know about a founder’s agreement” which can help deepen your understanding.
- How should the company’s equity (shares) be divided among the founders?
[Equity division usually, but not always, determines control of the company/startup, the division of profits and other aspects. Founders must decide if equity will be split equally or based on contributions such as time, money, expertise etc. This decision sets expectations for fairness and commitment. Don’t forget to leave about 20% for the equity pool (for future employees). Although it is common to think that a 50%-50% split with two founders is the best way to go – it’s usually the worst. If there’s no choice, make sure that your lawyer – me of course 😊 – adds a third-party tie-breaker mechanism]
This article may help better understand this topic (it’s focused more on existing startups but still): How Much Equity Should a New Founder Get? - How long is the vesting period?
[It’s a little complicated, but the simple explanation is that the shares/percentages aren’t given to the founders immediately, but over a certain period of time – usually between 3 or 4 years, a little bit each time each quarter of a year. A vesting schedule incentives long-term commitment and prevents founders from leaving with a large chunk of shares after a short period of time.] - How long is the ‘cliff’ period?
[A cliff period is kind of like a ‘trial period’ and is usually 1 year but can be anything from 6 months to 16 months – depending on the circumstances. If a founder leaves before the cliff period ends, they don’t receive any equity – protecting the company from early departures] - Appointment of Directors: who will be a director in the company?
[All founders are shareholders, and usually (but not always) also directors. Most of the material decisions for the company are made by the Board of Directors (BOD). At the beginning, each co-founder appoints themselves as director, and when investors get involved, they too appoint directors.] - How will decisions be made by the BOD?
Will they be made by a simple majority (2 directors against 1) or are there some issues that require 100% consensus (meaning that all directors vote yes/no on the decision). This is something that your lawyer will guide you on, but you should just be aware of it. - What is the mechanism for handling disputes?
[Do the founders go straight to court or are they obligated to first have mediation or arbitration?] - What is the mechanism for firing a founder?
[There are a few options here and your lawyer needs to explain them. One option is that the majority of founders can fire/terminate a founder for any reason. Another option is that a founder can be fired only for a closed list of reasons/situations.] - Assigning Intellectual Property.
[All the founders need to know that any IP that they create will be assigned and belong to the startup or future company]
Final words: The founder’s agreement should contain many other topics, such as confidentiality, non-compete, non-solicitation, founder-loans, buyout mechanisms and much more – but these are all topics that your lawyer should guide you on.
I’m often asked if founders can draft the agreement themselves. The answer is yes. But that’s not the question. The question is “should they?” and here my answer is “No!”. The founder’s agreement is a very important agreement, and you should not do it yourself.
If you’re not sure, feel free to contact us and we’ll be happy to help.
