Why Should One Go For A Founder’s Agreement?

Last Updated at: Nov 23, 2020
On 30th September, 2020, ETgarage, the Hyderabad-based startup announced a strategic partnership with VeriDoc Global, an Australian blockchain solutions giant. The startup hopes that this partnership will lay the foundation for faster translation of blockchain technology in India.


Founders’ agreement is important for the presence of any business startups. There are many establishments which are unsuccessful due to the lack of an appropriate founder’s agreement. In which direction a startup is going can never be determined. It may be successful and reach new heights where the founders will develop conflicts with each other.

There are so many complications involved in a business startup. There are situations where losses are incurred and situations where huge profits are made. The founder’s agreement will play a fundamental role in demonstrating the percentage of profit or liabilities each founder will abide. Some of the reasons why every startup needs founder’s agreement-

Frameworks duties and decision-making process

No one is assured about what will happen to the business in the future. It is important to designate the duties of each of the founders so that the business can be run efficiently at all times. The founder’s agreement should state the role of each one of the founder. For example, it can state one founder to be in control of the operations while the other one in control of the major decision making. There are situations where both the founders will disagree with each other opinions in the decision-making process, in such instance, the founder’s agreement should direct to the founder who will make the final decision. It is important for the founders to evade escalation of conflicts in the business which can reach levels where the organization will risk dissolution.

Equity Possession

The founders of the organization will dictate altered amounts of money and time in the business. The founder’s agreement should clearly state the possession strategy of the business and how it can advance in the over time. The finest agreement should bring into line the business success with the financial success of the organization. It is important for the founders to avoid instances where the business will be successful, and founders will end up in conflicts on how much will each one of them receive. The finest agreement should share the profits from the business startup regarding the amounts of capitals each member has contributed towards the organization.

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And while considering equity split between founders, you should consider dynamic equity split and vesting period.

Using a dynamic-split model, entrepreneurs can determine exactly how much equity each person in the startup deserves with a level of accuracy not possible in a fixed-split model. In a fixed-split model, the founders decide in advance what the founders are worth based on the future contributions they’ll make but in a dynamic-split model, equity decisions are based on what founders’ current contributions.

Vesting stock is stock which is awarded to a holder that has contractual restrictions placed upon it until certain conditions are met. The “vesting” occurs when the requirements are met, and the stock becomes free from the contractual limits. So rather than the founders owning the entire equity outright, vesting agreement is used as an incentive for the continued contribution of the founders i.e. no. of years.

Exit Strategy

It is important to bring into line about the founder’s vision, objectives and exit strategy in the business. No one will be willing to think about exiting the business startup when it is time to commence the business. But, founders should be open about it and put direct procedures which should be followed if one of the founders will like to exit. This is important to evade instances where individuals with different opinions will exit the organization when they are needed or their exit will lead to excruciating losses in the business.

The Departure of the founders

There are instances where founders will prefer to leave the business and focus on their personal issues. It is important for the other founders to evade instances where the founders will leave the business and business being exposed to the risk of dissolution. There are chances of ending up wasting a lot of time trying to discuss on what should be taken by the founder who decided to quit. But a finest founder’s agreement will make it easy for everyone to take the necessary action on one of the founders quitting the business.

Intellectual Property Possession

The intellectual property established by the organization should be allotted to the enterprise. Founders should avoid making mistakes related to the allotment of copyright ownership to the individuals. If one of the founders decided to part way, and the other founder had established the intellectual property, then he/she will render the startup less useful in operating. So, it always advised that to check the founder’s agreement and make sure that intellectual property is protected under the business name.

Mergers or Material Transactions

There are times when the business will come across new offers. It will be easy for the founders to take the benefit of new offers such as mergers or material transactions if it is clearly mentioned in the founder’s agreement the way founders can merge or carry out future transactions affecting the business operation.

Company Dissolution

There will be a time when the business needs to be shut down due to various reasons. It is important for the founders to have a clear plan as to how the company can be dissolved during the start-up stage. It is important to evade instances where founders will end up dissolving the company, and end up disagreeing on how one can share proceeds which will be created due to the dissolution.

So, due to all the above reasons, it is suggested that draft a founders agreement whenever you are starting a new business startup.