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.
The Importance of a founders’ agreement
The founder’s agreement lays the foundation for future co-founder relationships, corporate structure, and the roles each owner plays in a company. No matter what type of business structure you choose, the founder’s agreement is an essential document.
Usually, businesses don’t need these documents, but we recommend starting one anyway. Protect yourself against the unexpected and the I-hope-this-never-happens scenarios with it. Taking a crucial step now could save you later on! If the spark in your eye turns into a solid business plan, you should draw up a founders’ agreement. Once it moves from “I have this idea” to “Let’s actually take it forward,” you’ll need it.
The following are a few reasons why a founders’ agreement is so important:
- The roles of each owner are defined in a company
- Provides a framework to resolve founder disputes
- Clears the air when a partner wants to enter or exit a business
- Protecting minority owners
- Demonstrates your business’s seriousness to investors.
Importantounders’ agreement should include the following:
Business and the Co-Founders’ Names
This agreement names both the founders and the company on which the regulations are to be agreed. The agreement may seem quite simple. This doesn’t change the fact that it is an important part of your founders’ agreement.
Validity of the Results
There will be a time when you’ll need to clarify the validity of the founders’ agreement, as well as a method for all parties to voluntarily terminate it. Never forget to include an escape hatch; no one knows what might happen in the future. Even if you’re overjoyed right now, you might want to think about the possibility that your life will eventually take a different turn. You should always be prepared for any unexpected twists and turns that may come your way.
Goals of the Company
You should write down your company’s goals, although these will change as your company evolves. Describe your services. Which industries are you in?
How do you appear to your customers, rivals, or employees? How do you plan to handle challenges?
Say you’re a provider of software-as-a-service who releases big features every three months, or a cupcake shop that only sells mint chocolate cupcakes. It is a crucial step, in either case, to plan how you want your company to operate — though, as previously mentioned, it is not legally enforceable, so don’t panic if you end up changing your model.
Roles and Responsibilities of each owner
It is not always right to leave all decisions to each co-founder, even if it is a successful company. In reality, splitting jobs up and defining tasks early on can help prevent redundancy and misunderstandings. While two co-founders may wish to work on every aspect of their company, what about a CEO and CTO? Definitely not. Making sure everyone knows what to do will result in a less wasteful and more efficient business. By being as specific as possible, it becomes more obvious. Particularly in the early stages, you should reduce costs and time sinks.
The importance of teamwork, transparency and communication does not diminish, however. With defined roles and responsibilities, you make it as clear as possible who has the final say on which issues and which facets of your company should be voted on.
Stock Dividends
Equities are essentially a way for the co-founders of a business to share the company. What is the ownership structure of your company among your co-founders? In your founders’ agreement, specifying can help you avoid misunderstandings, hurt feelings, and possibly worse.
Ideally, you should keep around 80 to 90% of your equity for future employment and other situations – at least 10% for your future savings.
The second thing you’ll need to do is to have an extensive and serious discussion about how and when your shares will be distributed. Despite the wide variety of options, there are no one-size-fits-all approaches—it all depends on what works for you, your company, and your personality.
Proprietary Information
Intellectual property rights can be defined as the information that distinguishes you from your competitors. Listed here are products, recipes, marketing materials, logos, branding, packaging, websites, company plans, theme music, and innovations, among other things. In summary, protecting your intellectual property is essential, and the founders’ agreement is a good place to start.
As a starter, you need to make sure that any intellectual property created for your company belongs to the company as a whole, rather than to a single individual. As an example, imagine one of your co-founders has developed a fantastic new recipe or process. If you have a contract, it should state that any intellectual property created for your company during working hours belongs exclusively to your company, not to any founders or employees.
Exit Reasons
The founders’ agreement should include exit clauses, including what to do if a co-founder consistently underperforms and needs to be fired. In the event that a founder leaves the company of their own accord, what will happen?
Even though bringing up these subjects can be difficult, they all protect the interests of every founder equally. This means that no one is exempt. Founders’ agreements deal with a wide variety of issues that are sadly not unique, and any enlightened partner will understand the importance of such planning.
Observations
Entrepreneurship may not seem the most exciting or important thing in the world, but founders’ agreements are extremely relevant. You’ll learn a lot about your business, your co-founders, and yourself along the way. To write one, visit Vakilsearch.com for assistance.