How does a Founders’ Agreement work?
Co-founders of a company create a written formal contract known as a founder’s agreement or contract. Among the many aspects of this contractual document that must be documented between founders and the company are ownership, rights, responsibilities, dispute resolution, etc.
Founders’ agreements (also known as shareholder agreements) are designed to protect each member’s interests and prevent future disputes.
In this way, each founding member’s role and expectations are clearly defined.
Often, founders’ agreements are recommended during the start-up phase because it provides more clarity and helps visualize long-term goals.
Founders’ Agreements: Why Do You Need Them?
A founder’s agreement has so many benefits. Here are some of them:
- Business Entity Type- The founders’ agreement will clearly define the type of entity that will be established by the co-founders. Thus, it clearly defines the future path to be followed.
- Detailed Business Plans- This document describes the vision and mission of the entity, as well as the short- and long-term goals that will be achieved over time.
- A clear definition of roles and responsibilities is imperative for the co-founders. With so many overlapping duties, you definitely need something in writing in order to avoid conflict. As a result, it is necessary to define the roles and responsibilities of co-founders, and this can only be achieved with the founders’ consent.
Drafting Founder’s Agreement
Founders’ agreements do not follow a set of rules.
As a result of the founders’ mutual understanding, the content of the Founders’ Agreement is charted.
There are, however, a few sections that must always be included in any Founders’ Agreement.
A Founders’ Agreement must include the following:
Business Definition
Define your business’s vision and mission before any other information is provided. Describe the goals and objectives of the business and what you plan to accomplish over the next few years.
Entity Type and Nature
The founders should describe what the company is and what type of business entity they wish to incorporate, as well as the short- and long-term goals they wish to achieve.
Role and Responsibility Assignment
It is understandable that the founders have so many overlapping roles that writing this part can be quite chaotic since this is the heart and soul of the founders’ agreement. You’ll gain a better understanding of each founder’s contribution once you’ve finished this part.
If possible, divide the founders’ roles according to their experience and expertise. For example, roles can be divided into operations, marketing, and finance.
Additionally, the founder will be able to work more efficiently if he knows what is expected of him.
Structure of Ownership
An agreement between the founders of a company must document the owners’ shareholding structure and the percentage of each founder’s initial contribution to the venture.
Share Transfer
An important aspect of any business is putting down rules on the transfer of shares by the founders. A lock-in period for a certain period of time should be agreed upon by the founders, during which the founders are restricted from transferring their shares.
Furthermore, this clause should provide information about what happens to founders’ shares if they transfer them before the lock-in period expires. Furthermore, it should clarify if third parties are permitted to acquire founder shares.
Making Decisions
It is a good idea for the founders’ agreement to outline the decision-making procedures to be followed in order to resolve conflicts. So, this section can be a reference guide when seeking answer to questions like what happens in case of a deadlock?
Founder’s Removal
In this section of the founders’ agreement, the conditions for removing a founder from the company are specified. These conditions include sexual harassment, misappropriation of funds, and taking up another job.
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