Contract with co-founder signed before starting startup?

Co-founder is someone we really trust. But still there is a possibility for dispute.

Is it better to put everything in writing and sign it before starting startup? Is it worth to pay legal fee before doing actual work on startup?

There's an alternative to either cargo-culting some partnership agreement you download from the web or spending at least $5k to have an attorney draft an agreement: use http://fairsoftware.net as a Pre-Incorporation Partnership Agreement. Basically, fairsoftware.net has paid the lawyers to draft a general software startup agreement that will hold up.

While you can certainly stay with FairSoftware after you launch, using their agreement pre Incorporation makes sense. And it's free! The CEO of FairSoftware.com, Alain Raynauld, wrote up a Guide on exactly this topic for StartupToDo.com. [note: I founded StartupToDo.]

Absolutely yes yes yes it's worth getting it in writing.

But no no no you don't need a lawyer. Here's why:

Writing shows intent and agreement. Later on no one can say "but I didn't know I was getting into that."

Lawyers are only needed if it comes down to a lawsuit. In such a case it would not have mattered that you had formalized into a legal doc, because obviously there's a dispute about the content and intent, otherwise you wouldn't both be spending $1000/day on lawyers now.

Is it worth to pay legal fee before doing actual work on startup?

In three words, when partners are involved, YES, YES, YES. Having been through co-founder disputes before, having done the documents up front would have saved a ton of pain and money. You can keep the costs fairly low by working with your partner to come up with all the details of how the agreements work before engaging an attorney.

A couple key items to consider that

• Reverse vesting
• Intellectual property ownership
• Non Competition?

Also consider vesting triggers. When X happens, partners are considered vested at such and such levels. Time based vesting makes sense assuming you'll all work on the project for a long time, but in the event that you sell, take capital, etc. - there should be vesting triggers in the agreement.

But, back to your question - have an agreement, but don't pay lawyers if you can avoid it. Lot's of times there are startup and SMB advocacy groups that have people who can review your agreement for you. If anyone is putting a large amount of money into the business, then I'd be more comfortable with something reviewed by a lawyer.

You can usually get a contract reviewed for a few hundred dollars.

Well, just piling on but absolutely have an agreement. Disputes that arise aren't necessarily because one is trying to take advantage of the other or is a crook or anything else bad but often because what's said and heard can be very different things. So get them down in writing to reduce the chances of miscommunication.

Yes, yes, and by the way, did I say 'yes'?

I wholeheartedly agree with Vinnyglennon and totally disagree (sorry!) with Jason concerning his comment that it is not wise to get someone with legal experience involved.

Showing intent is fine - but if the wording is not clear, or the matter has not been sufficiently well thought through (and in the excitement of it all, it's a very easy mistake to make,) then there may be areas of genuine misunderstanding or possibilitites which neither of you have considered. And this brings me to Jason's point.

All too often, contracts are used soley as a blunt instrument to beat someone around the head with when it all goes wrong - but that is too late. Instead, they should be used as Vinny's 'fences' to prevent problems. Good lawyers, therefore, are not those who write contracts which unnecessarily destroyed a whole rainforest, but those who understand how business works, what might go wrong, and how to help you create a document which sets out the rules and boundaries of your arrangment in such a way that there can be no misunderstandings.

Written contracts are not a sign that you don't trust the other person, but rather than you want to protect both your interests by ensuring you both have the same understanding, and that everything is clear and fair from the outset.

1. If you and your co-founder truly trust each other, then you should both be happily willing to put this trust down in writing.
2. If you've never drafted any contracts before, at the very least you might consider running the document past a lawyer just to see if you've done something in error.

There are certain cases that this is actually required by law (although admittedly not relevant for US residents). In Bulgaria (my home country) to form a partnership as a unit, you need a Partnership Contract between all of the founders. You submit this contract when you apply to the Trade Register. So it makes perfect sense and I think it is a good practice.