Founders Agreement - Overview
A founders agreement is an official contract or a legal agreement executed between the co-founders of the company while setting up a business. This agreement elucidates the roles, rights and duties, responsibilities, ownership, liabilities, and investment proportion of each founder.
- A founders agreement should be made in the written format, not oral
- Two or more partners jointly can enter into the founders agreement called co-partners/ parties
- All co-founders will enter into the agreement exactly while incorporating the business or company.
The objective of the founders agreement is to avoid disputes regarding business, which may arise over time between co-founders. This agreement apparently set out the strategy of the founders, who should act within the ambit and should follow the mandatory provisions laid on.
Founders agreements also help in tackling uncertain occurrences like the death of the co-founder, resignation, which directly affects the sustained growth and smooth running of the business or firm.
Benefits of a Founders Agreement
Determining the Type of Business Entity:
The founders agreement will clearly mention the nature and type of entity that should be established by the co-founders, thereby setting the proper path to be followed.
Outlined Business Plans
This agreement describes the vision and mission of the entity and sets the short term and long term goals to be achieved over a period of time.
Designating the Roles and Responsibilities
Obviously, there will be overlapping roles and functions between co-founders without having a proper framework of the assigned roles. Therefore, it is important to designate the roles and responsibilities of the co-founders, in accordance with their area of mastery like marketing, operations, finance, etc.
Structure of Ownership
The founders agreement will clearly specify the structure of ownership pertaining to the initial contribution made by the cofounder or the percentage of the equity shares held by the cofounder in case of a company, thereby avoiding any future conflicts in between them.
Decision Making
At a certain point in time, there will be an ideological conflict between co-founders, So these conflicts are to be handled through the proper decision-making process. Here the founders agreement will formulate a procedure to be followed during the decision making process. If the voting system is adopted, then it should define the value of votes for each founder and provide a solution in case of a deadlock situation.
Compensation Provisions
This agreement laid down the scheme of compensation to be carried out, if anyone of the cofounder has violated the provisions mandated. Here, the proportion of the compensation to be made will be mentioned for every cofounder.
Expulsion of Co-founders
Any co-founder can be evicted from the company for indulging in fraudulent activities like misappropriation of funds, sexual harassment, and getting employed with other organisations. This agreement ensures a proper structure on how to deal with these situations and sorting out appropriate funds to be reverted to the expelled co-founder.
Confidentiality
There was a separate clause on confidentiality in the founders agreement, which makes an obligation for founders to not reveal the secrets of the business.
Documents Required for Preparation of a Founders Agreement
- Address proof of all co-founders
- Identity proof of all co-founders
- Identity proof of witnesses
- A clear objective of the company
- The number of equity shares of each co-founder
- The overall percentage of shares of each co-founder.
Procedure for Drafting a Founders Agreement
The procedure for drafting the founders agreement involves the following steps:
- Step 1: The draft of the founders agreement is prepared by including all the required fields, like objectives of the company, terms, and conditions to be followed by the co-founders
- Step 2: Once the drafting process is complete, check if all mandatory provisions have been included, with no ambiguous clauses
- Step 3: Add additional information that has to be furnished in the agreement, if required
- Step 4: The final draft should be acknowledged by all the cofounders, that it has been scrutinized with acceptance of the aforementioned agreement
- Step 5: Once all co-founders have agreed to the agreement, it should be notarized on a non-judicial stamp paper
- Step 6: After notarizing, get the signature of all the co-founders on the agreement
- Step 7: Before entering into the agreement, get expert guidance to avoid disputes.
Key Terms of a Founders Agreement
- Founders: This section identifies the names of the co-founders and their respective roles and responsibilities within the company
- Ownership: The equity ownership structure of the business is described in this section, along with the percentage of ownership held by each co-founder
- Vesting: This section sets forth the vesting schedule for each co-founder's equity ownership in the company. Vesting is a mechanism that ensures that co-founders earn their equity over time, typically through a four-year period with a one-year cliff
- Management and Control: This section outlines the decision-making structure of the company, including the process for making important decisions and the roles and responsibilities of each co-founder in the decision-making process
- Intellectual Property: This section of the founders agreement addresses the ownership and protection of the company's intellectual property, including patents, trademarks, copyrights, and trade secrets
- Confidentiality and Non-Disclosure: The responsibility of each co-founder to protect the privacy of the business's proprietary information and trade secrets are described in this section
- Termination and Exit: This section outlines the circumstances under which a co-founder may be terminated from the company and the process for exiting the company, including the right of first refusal and buyout provisions
- Dispute Resolution: This section sets forth the process for resolving disputes between the co-founders, including mediation and arbitration.
Founders Agreement Template
THIS FOUNDERS' AGREEMENT ( also referred to as the ‘Agreement’) is made as of [DD/MM/YYYY] by and among [XXXX] (the ‘Company’), and the following founders (the ‘Founders’):
- [Insert Founder Name]
- [Insert Founder Name]
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows:
I.Business Venture
The Founders have created [XXXX]
The Company's initial place of business is located at [business Address]
II.Initial Capital
Each Founder agrees to contribute ₹₹₹ as non-refundable initial capital to account for expected and potential company expenses.
The Corporation may receive further capital contributions to help cover future operational expenses. These further capital donations may only be made with the Founders' unanimous written consent.
III. Ownership Structure
Following the company's establishment, the founders will get the following percentages of ownership:
[Provide an explanation of share distribution in your founders agreement]
These shares are intended to demonstrate the Founders' initial proportional ownership of the Firm. These shares do not qualify as securities of any kind and are not transferable.
IV. Voting
Voting rights shall depend on the distribution of each Founder's percentage of shares in the event that a matter arises that relates to the business venture and necessitates a majority vote in order to proceed.
[Insert Name] will conduct the deciding vote in the event of a tied vote.
V. Vesting Schedule
The founders may establish a vesting timetable, if they so want. The shares granted to each founder will vest according to a vesting schedule that will be decided upon later by agreement of all the founders.
The remaining portion of any shares that are entitled to a founder will be returned to the company if the founder ends their association with the company for any reason prior to the vesting of all of their shares.
VI. Intellectual Property Ownership
Throughout the duration of this founders agreement, each founder shall cede and assign to the company all of their rights, titles, and interests in the business venture, including all ideas (whether formed or unformed) and work product that stems from any activity performed by the Founder. Additionally, each founder shall take any other steps as may be required to grant the company full legal ownership of the business venture and any associated intellectual property. ( also add other terms and clauses as per your business and IP values)
VII. Amendment and Waiver; Termination
No oral amendment, modification, termination, or waiver of any provision of this Agreement shall be binding. Only a written agreement signed by the Founders may alter, modify, or terminate this Agreement.
VIII. Resignation and Removal in Founders Agreement
A Founder may resign from the Firm by providing written notice to the other Founders. Upon resignation, the departing Founder will receive any positive capital account balance within 180 days. In the event that all Founders choose to resign, the Company will dissolve, and this Agreement will terminate after the Company's affairs have been settled and assets and liabilities distributed according to this Agreement. Additionally, each Founder acknowledges that a majority of votes is required under the voting rules specified in this Agreement to remove any Founder.
IX.Miscellaneous Provisions
A. Confidentiality
The Founders are obligated to ensure the confidentiality of any material labelled as 'Confidential Information', including but not limited to business records and plans, trade secrets, technical information, product concepts, contracts, financial data, pricing structure, discounts, computer programs and listings, source code and/or object code, copyright and intellectual property, inventions, sales leads, strategic partnerships, partners, and client and customer lists. The nature of the material and how it was shared would suggest that a reasonable person would expect it to be kept confidential. The disclosure of Confidential Information will only occur when necessary and with the unanimous agreement of all Founders.
B. Dispute Resolution
The Founders undertake to make a good faith effort to resolve any disagreement through mediation supervised by the American Arbitration Association, or an equivalent dispute resolution agency, if one arises out of or relates to this Founders' Agreement or its breach. If mediation cannot resolve their dispute, the Founders agree to arbitration performed by the American Arbitration Association or an equivalent dispute resolution agency. On the basis of the Award, any court having jurisdiction may render a decision.
C. Severability
The parties agree to revise this Agreement to give effect to the struck section as fully as is practicable if a court rules that any term of this Agreement is unlawful, void, or unenforceable. The remaining provisions of this Agreement will remain in full force and effect.
D. Entire Agreement
Any prior agreements and understandings between the parties are merged into this Founders Agreement, which is the only document that fully and accurately captures their understanding. No statement or representation made by the other party not contained in this agreement will be relied upon by either party. Only a formal revision signed by all parties may change this agreement. The parties to this agreement have caused it to be properly completed as of the date first mentioned above, IN WITNESS WHEREOF.
FOUNDER #1
___________________________________________________
[Insert Founder Name]
FOUNDER #2
___________________________________________________
[Insert Founder Name]
Why Vakilsearch for Founders Agreement?
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- If you need any changes done to the agreement, our lawyers will do the needful and send it across to you for your view once again.