Legal Clinic · Clinic matter

The Co-Founders' Contract

Two founders, a handshake split, a different cap table and an investor's term sheet that expires in three weeks.

It is Monday, 10:00, at the start-up clinic of a university law school. You are a clinic adviser, supervised by Ms Odile Fraser, who reviews your advice before it goes out. A walk-in client, Mira Okafor, is a founder of Lumen Learn, a two-person software company. She and her co-founder, Jonas Weber, agreed in a cafe, eighteen months ago, to split everything fifty-fifty. She wrote nearly all of the code, much of it before the company was set up. Last week an investor sent a term sheet offering 400,000, open for 21 days. Mira then learned that the company's records show Jonas holding 70 per cent of the shares and her 30. She has signed nothing. She is hurt, angry and afraid of losing both the deal and the friendship.

Who is on the call

Mira Okafor, Co-founder, your client
Jonas Weber, Co-founder (not your client)
Ms Odile Fraser, Clinic supervisor
Priya Anand, The investor's representative

The Marland Companies Act (invented): what applies in this exercise

You do not need any outside knowledge. This is the rule you must apply, and it is printed beside every step.

The register of shares is the record of who owns what. A verbal agreement may be evidence of an understanding but does not change the register until it is put into effect.
Software written by a person before it is assigned to the company belongs to the author unless there is a written assignment. An investor will usually require founders to assign their code to the company.
Founders should have a written agreement covering equity, vesting (earning shares over time), what happens if a founder leaves, intellectual property, roles, decision-making and exit.
A person must not mislead an investor about who owns the company or its code. Silence about a known dispute may amount to misleading in some cases.
A clinic can act for one client only. Where two people's interests conflict, the clinic acts for one and tells the other to seek his own advice.
Agreements should be in writing and signed, and the share register updated to match.

What can be lost

Your client's position: Whether Mira keeps a fair share of the company and of what she created.
The deal and the relationship: Whether the investment and the founders' relationship survive in good order.
Your clinic's standing: Whether your advice is careful, honest and within what a clinic can do.