A founders' agreement is required if you wish to run your business with co-founders. This article spells out each owner's rights and responsibilities, which is a crucial step in avoiding co-founder disputes. Let's take a look at the key terms in a Founders' Agreement. A founders' agreement is a contract signed by all of a company's co-founders. The agreement outlines the founders' and company's ownership, rights, obligations, dispute resolution, and other terms to be followed.
A founders’ agreement is a contract signed by all of a company’s co-founders. The agreement outlines the founders’ and company’s ownership, rights, obligations, dispute resolution, and other terms to be followed.
Importance of Having a Founders’ Agreement
A founders’ agreement establishes a foundation for future co-founder relationships, corporate structure, and what each owner contributes to the organization. It is critical regardless of the type of business entity structure you have.
This document is usually optional, but we don’t recommend starting a business without one. It’s your protection against the unexpected and the I-hope-this-never-happens scenarios. Don’t put yourself in danger later on by neglecting a crucial step now! A founders’ agreement should be drawn out as soon as the spark in your eye turns into a solid business plan: as things move from “I have this idea” to “Let’s actually accomplish this,” you’ll need one.
The following are some of the reasons why a founders’ agreement is so important:
- The role of each owner in the company is defined
- Provides a framework for resolving founder disputes
- Provides clarity if and when a partner wants to enter or exit the business
- Minority owners are protected
- Signals to investors that you have a serious business.
Key Terms Included in a Founders’ Agreement
A founders’ agreement should include the following:
Business and the Co-Founders’ Names
The founders and the company for which the regulations are being agreed upon are named in the agreement. This may appear to be quite basic—and it is. However, this does not negate the fact that it is an important part of your founders’ agreement!
Length of Validity
Eventually, you’ll want to clarify how long the founders’ agreement will be valid, as well as a method for all parties to voluntarily terminate the agreement. Remember to include an escape hatch; after all, you never know what can happen down the road. It won’t legally bound you to continue working for your company indefinitely, but even if you’re ecstatic right now, you should contemplate the chance that your life will someday take a different path. Just in case, prepare for every twist in the way.
This will undoubtedly change as your business evolves, but it’s a good idea to write down what your company’s objectives are. What services do you provide? What are the industries in which you work?
How does your company appear to a customer, a rival, or an employee? What kinds of strategies are you willing to try?
Perhaps you’re a software-as-a-service company that promises to release new big features every three months, or a mint chocolate cupcake shop that only sells mint chocolate cupcakes. Predicting and documenting how you want your company to run is a vital step in either case—though, as previously stated, it is not legally enforceable, so don’t panic if you end up shifting your business model!
Each Owner’s Roles and Responsibilities
Even if you run a successful company, not every decision should be left up to each co-founder. The reality is that splitting jobs and defining tasks early on helps you prevent redundancy and misunderstanding. Two co-founders may wish to work on every aspect of their company, but what about a CEO and a CTO? Not at all. You’ll have a less wasteful, more efficient business if you make sure everyone knows what they need to do. The more detailed you can be, the more obvious it will be. Costs and time sinks should be reduced, especially in your early days.
Of course, this does not diminish the importance of teamwork, transparency, and communication. In fact, by defining separate roles and duties, you’re making it as clear as possible who has the last word on which issues and which aspects of your company should be decided by consent.
The basic idea behind equity is that the co-founder of a business will automatically want to share the business itself. But how do you distribute the equity in your company among the co-founders? You’ll avoid misunderstandings, upset feelings, and possibly worse if you specify in your founders’ agreement.
First and foremost, you should only split up roughly 80 to 90 % of your equity—preferably to save at least 10% for future employment and other scenarios.
Second, you’ll simply need to have a lengthy and serious conversation about how and when your shares will be distributed. There are many options, but there is no one-size-fits-all solution—it all relies on your partnership, your company, and your personalities and contributions.
Intellectual property is the creative information that distinguishes your company from the competition. This covers things like your products, recipes, marketing materials, logos, branding, packaging, websites, company plans, theme music, innovations, and so on. It suffices to say that protecting your intellectual property is important, and the founders’ agreement is an excellent start.
To begin, make sure that any intellectual property created for your company belongs to the company as a whole, rather than to a single person. Let’s imagine one of your co-founders invents a fantastic new recipe or process. Your contract should indicate that any intellectual property created for the company during working hours belongs to the company, not to any co-founders or employees.
Clauses of Exit
Finally, a founders’ agreement should cover exit clauses, such as what to do if a co-founder has regularly underperformed and needs to be fired. What if a co-founder decides to leave the company on his or her own accord?
Remember that, while bringing up these subjects can be difficult, they all serve to safeguard each co-founder equally. There is no one who is exempt. The issues dealt with by a founders’ agreement are sadly not uncommon, and any competent partner will recognize the importance of such planning.
Although a founders’ agreement may not appear to be the most important or exciting aspect of being an entrepreneur, it is extremely important. Along the path, you’ll learn a lot about your company, your co-founders, and yourself. If you’re having trouble drafting one, try seeking assistance from the experts at Vakilsearch.