In general words, a founder’s agreement is a kind of contract being executed between all the co-founders of a company. Here the agreement, carries ownership, rights, responsibilities, dispute resolution, and other terms that need to be executed between the founders and the company.
These kinds of conversations aim to have a clear discussion about the aspirations, attitudes, and fears of individuals involved.
There are two documents:
1. Need for Conversation Guide:In this, answering difficult questions will help in the future you and your co-founders to avoid personal conflicts.
2. A Model Founders Agreement: In the Founders Agreement it is said to be a contract that a company’s founders enter into. It is a contract that governs their business relationships. This kind of Agreement lays out obligations on each founder such as the rights, responsibilities, liabilities, etc.
These agreements regulate matters that may not be covered by the company’s operating agreement. Hereby the Founders’ Agreements are designed to protect each other’s such as the founder’s interests. It memorializes all founders in agreement about the venture’s basic structure and how the founders will work together to move their business forward. It should not have been seen the agreement between all founders helps to mitigate the risk of a lawsuit. Some provisions can be addressed in a Founders’ Agreement.
Important clauses of Founder’s Agreement
Clauses Included in Founder’s Agreement are:
- transfer of ownership;
- ownership structure;
- confidentiality of matter;
- decision-making and dispute resolution;
- representations and warranties;
- choice of law.
Above are some of the essential provisions that are commonly seen in Founders’ Agreements.
The provisions in the document are at the end of the agreement and the first four pages of the documents are the template agreement.
Why Founders’ Agreement?
Talking about founders’ agreements serves as the bedrock of a new business formation. They lay the groundwork for how you interact and manage the business as a team. It is unnecessary to utilize a founder’s agreement.
Reasons to have a founders’ agreement includes:
Reason 1 : Establishes ownership roles and responsibilities
Reason 2 :Offers guidelines for dispute resolution
Reason 3 : Provides rules surrounding the contract’s termination
Reason 4 : Gives direction for handling a dissolution
Reason 5 : Protects minority shareholders
Reason 6 :Strengthen the seriousness of your business formation
These all reasons specify that founder’s agreements are essential to a well-planned business venture with more than one person involved in it as well as they attract investing tools since they signal to investors that they are organized. One should always ensure that you have a founders’ agreement at every new venture starting.
Essential Parts of a Founders’ Agreement
Such like in any other contract, the founder’s agreement contains standard provisions and guidelines in it.
Some of the essential parts of a founders’ agreement are:
- Roles and responsibilities
- Ownership structure
- Co-founders as managers
- Vesting schedules
- Percentage of shares distribution
- Voting rights
- Capital contribution requirements
- Contractual communication
- Dispute resolution
- Choice of Law clause
- Representation and warranties
- Non- Competition Clause
- Promissory notes
In general, these agreements are designed to be so like that you won’t miss a single step in the planning process.
Steps to create a Founders’ Agreement
Talking about the process of creating a founders’ agreement. So it will look different for every startup. This will depend upon one approach basically on a company’s scale, scope, and size.
Step 1. It is to decide if a Co-Founder Relationship Is a Right Fit for you or not
Sit together and ensure that you align with your partners on specific points like goals, values, expectations, and work style. One of the things that are the most common cause for a business dispute is differences in opinion.
Critical Questions to ask include:
- What are the objectives?
- What are my values?
- What is success to me?
There are people that agree with most of the time, it is critical that you at least align in common areas.
Step 2. Establish Roles and Responsibilities
In a startup at starting two people are covering multiple roles. In this one can delegate responsibility across your entire team. One can negotiate and assign these roles before setting any major role.
Some of the roles that one may need to fulfil includes:
- Chief executive officer (CEO)
- Chief operating officer (COO)
- Chief financial officer (CFO)
- Chief marketing officer (CMO)
- Chief technology officer (CTO)
While forming a team, it consists of just a CEO and CTO. It depends upon the founders how many founders are there on the board.
Step 3. Critical Legal Decisions
This Critical Legal mistakes that one faces can be another common downfall of new startups. It is not compulsory for anyone that one should go to law school to run a company. One should familiarize yourself with critical legal issues and decide how your company will handle them if anything like that comes into the way.
1. Safeguarding your intellectual property or IP assignments
2. Creating co-founders’ vesting schedule on share issuance
3. Determining how to handle the departure of crucial founders
4. Establishing day-to-day company management
5. Learning the definitions of basic legal terms
6. Deciding on the particulars of corporate by law
When one Co-found any business it can also be compared to a marriage. Business is a serious, long-term commitment for an individual. It is very much important to have the roles and responsibilities and working arrangements clear between each other. In the case of founders getting together, they usually do not discuss separation. Their aim is better to be prepared for events. For the continuity of the business, strengthening each founder’s commitment to the business is very important. Founder’s Agreement is a fundamental step in every entrepreneur’s journey.