Why Founders Agreement Is Important for Every startup

It can be challenging to stop and look back when you are living your lifelong dream of being an entrepreneur. When you are responsible for running startups, momentum is everything in the game; if you slow down, you’ll miss your chance. But frequently, you must stop, take a deep breath, and check to ensure you haven’t missed out on anything significant in the process. Finishing all the legal formalities to safeguard your position in the company is crucial. 

A founders’ agreement is crucial if you intend to run your business with the co-founders who helped you start it. When you are just starting as a company’s co-founders, everything seems perfect, and your business relationships are at their peak with no dispute whatsoever. However, with time the relationship between the co-founders may go through several highs and lows. This is where a founder’s agreement becomes a vital document. It does not just help prevent any future disputes amongst the co-founders but also determines the venture’s fate. Let us now understand what a founder’s agreement is.

What is a Founders Agreement?

A founders’ agreement is a written, legally enforceable document describing the obligations and rights of each company owner. It could be a separate co-founder agreement or included in a partnership agreement, an LLC operating agreement, or corporation bylaws. It safeguards the interests of each founder and minimizes any future disputes. The founders’ agreement is significant to the business, and sometimes a venture’s future may be in jeopardy because a founders’ agreement is not specified correctly. It details the rights that come with each share, including the right of first refusal, the tag-along right, the pre-emptive right, and the anti-dilution right.

The founders’ contract will cover things like: 

• The co-founder agreement includes the resolutions regarding the amendment of the articles of incorporation, adding new shareholders and calling for a special majority. 

• Founders agreement also acts like a startup shareholders agreement amongst the founders and entails a plan for how shares and other assets will be distributed amongst them. It also includes the number and types of shares to be allotted to each founder and the rights attached to each of these shares. The agreement also mentions the division of shares if one of the founders decides to leave or the business liquidates.

• A mechanism for dispute redressal through arbitration and mediation to prevent wasting of time and resources.

• Process for choosing the company’s board of directors, CEO, accountant, and other officers in startups

• Determining who will control the company’s assets, including its intellectual property, which comprises copyrights, patents, and trademarks. The ownership of the intellectual property, whether it belongs to the founders, the business, or a third party, must also be specified in the founder’s agreement.

• Assigning roles and responsibilities that clearly define the obligations of each founder, whether they will be receiving the remuneration of their work and what will be their employment terms and conditions, etc.

• Confidentiality and non-competition clauses – These provisions protect the company’s interests and avoid harm to its operations and revenues by preventing the disclosure of confidential data and information to undesirable parties and preventing the founders from engaging in competitive activities. 

• The terms of termination of the founders’ agreement, including the circumstances under which the harmed party shall be entitled to compensation.

What else is included in a founder’s agreement?

We’ll examine the co-founders’ agreement’s contents more closely now that we understand what it normally comprises. What precisely is in a founder’s agreement? What does a founder’s agreement template look like? What must be discussed while drafting one with your co-founder? What meaningful choices must you make before making a brilliant founder’s agreement?

Even though founders agreement templates can be different for different businesses. Let’s have a look at some common features that are present in all founder’s agreements:

The Names of Co-Founders and the Business

Typically all founders agreement templates specifies the founders’ names and the business for which they establish the rules.

Validity

The duration of the founders’ agreement and a procedure for its voluntary termination by all parties should be made clear.

Goals and ideas of your company

Putting your company’s goals in writing and on paper is a good idea. However, they may change as your business develops and changes. What goods do you provide? What industry do you work in? How does your company appear to customers, competitors, or staff members? What kinds of strategies are you willing to try?

Roles and responsibilities of each owner

Not every decision should be made by every co-founder, even if you run a tight ship of a small organization. The truth is that early division of roles and responsibilities will help you prevent confusion in the future. 

Specifying equity 

The fundamental idea behind equity is that a company’s co-founders naturally desire to share the company’s ownership. Just like a startup shareholders agreement, a founder’s agreement also specifies the equity allocated to each of the founders and contains the details of any capital the founders or investors have raised. 

Salary and Compensation

The founders’ agreement includes an imminent and crucial section on salary and compensation, which provides for the salary drawn by each co-founder.

Termination clauses

Last but not least, a founders’ agreement should cover the conditions of exit, such as what happens when a co-founder has persistently performed below par and needs to be terminated. What if one of the company’s co-founders decides to leave voluntarily?

It is important to note that all these clauses are meant to safeguard small business startups and all co-founders. Therefore any decent partner will see the founder’s agreement as a necessity for the organization. Sadly, the problems that a founders’ agreement addresses are not uncommon.

Conclusion

By now, you’re probably starting to realize the potential value of a particular founders’ agreement. If you are running a small business startup and are new to the idea of a founder’s agreement, you can look for some sample founders agreement online. It could be compelling to think that the founder’s agreement is unnecessary. However, it cannot help from a legal perspective. But by having a founder’s agreement in place, you’ll avoid any major emergencies that a disagreement between the founders can bring up by outlining these financial specifics as soon as possible.

Founders’ agreements can be of great help when dealing with disagreements between the co-founders and must in no way be waived. The absence of a founders’ agreement may discourage potential investors from funding the business and make fundraising a more complicated process.