The founders’ agreement contains all the details of the founders. It clearly explains the rules and regulation of how the business will be conducted and the role played by each founder in it. Learn how to create a founders agreement directly from the experts at Vakilsearch.
A business entity usually has a founder who owns the business. In some cases, more than one founder will be present in the firm. As a result, a founders’ agreement has to be signed between all the co-founders. This is important for smooth business execution. This blog discusses about How to Create a Founders Agreement in detail.
What Is a Founders’ Agreement?
A founders’ agreement is a legal agreement that the founders of the company sign. This document contains everything starting from people involved in the business, how much they will invest, positions and obligations of all co-founders, capital ownership, legal assistance, and what happens if someone resigns.
It is a necessary agreement developed while setting up the company, to bring transparency and avoid any doubts in the future.
How to Create a Founders’ Agreement
To create a valid founders’ agreement, you will have to follow the steps below.
- Initially, all the required data, like the goals of the firm, rules, regulations, and conditions that have been accepted by the co-founders are collected. This data is used for drafting the founders’ agreement
- The founders’ agreement should be free from any diplomatic clauses. In fact, it should be simple, precise with greater transparency in the terms and conditions
- All the additional information and evidence have to be provided with the agreement if required
- The final draft of the founders agreement has to be passed on to all the co-founders
- The co-founders should have to read all the terms and conditions
- When all co-founders have decided on the agreement, it should be drafted on a non-judicial signature paper
- After all the process is completed, the founders’ agreement is drafted, and it has to be signed by all the co-founders.
It is crucial to analyse every term mentioned in the founders’ agreement, if you have any queries regarding the same feel free to reach out to our experts at Vakilsearch.
What Should a Founders Agreement Contain?
A perfect founders agreement should have the following details without fail.
Names of the Founders and Company
A founders’ agreement should have the names of all the company partners involved. Having a successful co-founder can help the company to propel itself in the future and receive further funding easily. Also, the company name has to be printed on the document.
Ownership Structure
The number of partners can be increased as people enter and quit the firm. If your firm is an LLC, you should also include the following:
- In your founders’ agreement, you have to assume that each individual is a proprietor in a financial understanding
- They have the power to manipulate an effective position in the administration
- All those positions and duties have to be explained to the co-founders and have to be mentioned in the founders’ agreement.
Business Structure
This is a very important fact that has to be mentioned in the agreement. The founders’ agreement should clearly explain the business structure.
- Initially, you need to describe the business plan
- It should contain an extensive summary of what you are doing and each founder’s role in it
- Describe the position of the founder and all the specifics in it.
Initial Capital and Additional Contributions
The founder must contribute anything like cash, or property towards the business and all these capital investments will be mentioned in the founders’ agreement.
- In case they pledge any other assets rather than money, the value of the assets has to be mentioned
- The founders’ agreement should also contain details on whether partners will proceed to provide capital throughout the functioning of the firm
Taxes
It is difficult to file a tax, and it is wise to employ a tax expert to assist you to include this portion in the founders’ agreement. A startup company requires all the assistance when it comes to including taxes and legal assistance that have to be documented in the founders’ agreement.
Roles and Responsibilities
Founders’ agreements should distinguish all the aspects of the positions and responsibilities of all co-founders clearly.
Management and Legal Decision-Making, Operating and Approval Rights
Each founder has to discuss who is going to take important decisions for the company. After finalising the person, this information should be mentioned in the founders’ agreement. Some startup companies give the rights to the CEO or other personnel who are in the higher hierarchy. Also, all the data regarding voting rights should be drafted in the founders’ agreement.
Equity and Vesting
The moment an individual starts funding for his business, equity and vesting come into action. The total number of shares and equity held by each co-founder should be mentioned in the founders’ agreement. The terms and conditions regarding the vesting of the shares should also be prioritised.
Salary and Compensation
Most of the founders choose not to pay themselves during the initial stages of the company. However, this may not be the same in every firm. All the details regarding the salary of the founders has to be drafted in the founders’ agreement.
Intellectual Property Assignment
Any intellectual property owned by the co-founders of the company should be mentioned in the founders’ agreement. This may include and not be limited to the company’s IP, blog posts, structures, or something relatively special.
Anything which is developed within work time is termed as the intellectual property of the company and should be acknowledged in the founders’ agreement.
Departure of Founders
If you agree to compromise during buyouts, be sure to summarise how a buyout would take place. If it is according to the buyout rate because your firm is still new, assess either establishing a rate now. Make sure to draft the rules and regulations of the founder’s departure procedure.
Dispute Resolution
This category is where you will explain a clear protocol to resolve any disputes that are expected to occur in the future.
If the founders experience any conflict with the founders’ agreement, It is resolved and finalised with binding arbitration, but it is up to you and your co-founders to agree.
Benefits of a Founders’ Agreement
- The founders’ agreement will illustrate the business structure clearly
- This agreement contains the business goals and ascertains the short-term and long-term objectives
- The founders’ agreement will certainly assure the ownership of the company
- The founders’ agreement will develop a protocol to be maintained during the decision-making procedure
- The details of the payment to be made will be drafted concerning every founder
- Any co-founder can be sacked from the corporation if they break the rules and regulations drafted in the founders’ agreement.
How Vakilsearch Can Help in Drafting a Founders’ Agreement
Vakilsearch is one of the leading legal online services in India with over 1000 companies availing legal assistance every month. Vakilsearch can provide ease and convenience when it comes to drafting a founders’ agreement. Reach out to the experts at Vakilsearch and start the process.
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