Founders Agreement

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Founders Agreement

A Brief Introduction About the Founders Agreement

It’s important for a firm’s founder to sign an agreement between themselves before the formation of a company, and this agreement is known as the founder’s agreement. This agreement is a record of conversation or deal that takes place between the founders of the company in the initial state of company development (Yaghmaie  et al, 2016). These recorded conversations aim to mitigate future risks, conflicts, and misunderstandings. The conversation should be open, honest, and about the objectives & aspirations of the startup. The founder’s agreement governs the relationship between the partners; it lays out essential rights and roles along with the liabilities of each founder. This agreement is designed to protect the interest of the founders and also memorialize that the founders are in serious agreement with their business venture (Stepanov,  2000).

Who Takes the Founders Agreement – People Involved

The founders of the business take this agreement to pursue a collaboration with each other (Stepanov,  2000). Two or more people are involved in the founder’s agreement. After signing the agreement, each partner will be responsible for their role in the company, their rights, and also the obligations related to the business.

Purpose of the Founders Agreement – Why Do You Need It

The purpose of a founder’s agreement is to form a baseline for the relationship between the founders of a firm. It also forms an outline of how the company will work in the future, what will be of contribution by each owner and what will they be liable or obligated for (Stepanov,  2000). No matter what type of business it is, it’s important that the founders sign the founder’s agreement. For some of the cases, this agreement is an option but even then, it’s highly recommended not to run a business without this one because this agreement acts as insurance if in case something unexpected happens. So as soon as the business plan is made, it’s important to develop a founder’s agreement also (Morgan, 2016). Legal service or a business lawyer can help the founders to make this agreement. Some of the main reasons as to why the founder’s agreement is important is that because firstly the founders agreement clarifies the role and responsibility of each founder in the business, it provides a formal structure for resolving conflicts or misunderstanding between the partners, it clarifies the procedure of when a partner wants to enter or exit the business , it also helps the minority owners by protecting them .

Contents of the Founders Agreement – Inclusions

The founder’s agreement includes the following:

  • Names – The names of co-founder and the business details. This is a basic requirement for any such agreement, and it makes an important part of the founder’s agreement.
  • Validity – Then it’s important to clarify that for how long with the founder’s agreement remain valid or when can the parties dissolve the agreement completely.
  • Goals and objectives – The company goals and objectives provide a direction for business growth and changes, so it’s a good idea to ink down the details in founder’s agreement along with a brief description of consumer, employees and other stakeholder involved in the business (Stepanov,  2000). This is an efficient way to list down the essential information and priorities related to the business.
  • Roles and Responsibilities – The decisions, big or small, should be taken mutually by both the partners or the co-founders together. The roles, responsibilities, and obligations of each partner will be mentioned to avoid confusion and misunderstanding in the future. It’s important to be specific and clear about the contributions of both partners.
  • Equity breakdown – The basic idea is that the co-founders want to share the business for which the company’s equity will be divided. But how will it be divided in what ratio will be mentioned in this agreement? (Stepanov,  2000).
  • Salary – It’s important to discuss the compensation that each partner will be entitled to in the agreement, to clear up the expectations.
  • Exit clause – This clause states various circumstances like what will happen if a partner underperforms, what if a co-founder wishes to leave the company etc.

How to Draft the Founders Agreement

  • To draft the founder’s agreement correctly, firstly, it’s important to find the correct agreement format for the founder’s agreement(Stepanov,  2000). The template is available online, or it can also be taken from legal services agent. The language used should be simple and easy to understand.
  • The name of the company with address details, names of the co-founders, their contact details, date of inception, state, country all this information should be mentioned. It’s important to prioritize on the business details (Morley & Shockley,1991)
  • Thirdly, details related to compensation, founders equity, venting, roles, obligation, responsibility, exit clauses should be specified (Lichtig, 2006). It’s better to mention every small detail to avoid confusion and conflicts in the future between the founders. Being honest and tactful while mentioned all these details is the strategy.
  • Once all these steps are completed, its recommended to double-check all the details, just in case anything is missed out because one small mistake can cause a big problem for any of the founders.
  • To make sure that the founder’s agreement is drafted correctly one should consider visiting a lawyer. The lawyer will help to understand if the agreement lacks something, or if the template is missing out any point, etc.
  • The last step is to finalize and design the agreement.

Negotiation Strategy

The startup founder can negotiate in terms of roles, responsibilities, obligations, or the compensation structure. The negotiation between the founders has to take place before signing the agreement. Also, before negotiating its vital, the partner is aware of all the terms and conditions, and accordingly, he/she can negotiate (Lichtig, 2006).

Benefits & Drawbacks of the Founders Agreement

Benefits

The founder’s agreement aims to legally establish roles, responsibilities, obligations, and equity of the co-founders. This form is filled in the early stage of the to uncomplicate the process in the future. The founder’s agreement can be tailored as per the needs and requirements of the co-founders. Without this agreement, it can become difficult to solve problems in the future. There are chances of a c founder just walking away in case of loss incurred in the business. But if this agreement is developed correctly and signed, then both the founders will be liable for the loss (Stepanov,  2000). With this document, the management and decision making becomes easier; the obligations and duties of the partners are clearly defined, which mitigates the confusion and conflicts in the future. Lastly, it becomes earlier to trust each other as the document is legal and signed.

Drawback

As such, there is no drawback of founder’s agreement. The issue related to this agreement may arise because of incomplete details when the agreement is not made as per the specific requirements of the co-founder, or there is lack of precision. An imprecise founders’ agreement can lead to conflict or disputes. Thus it’s important to consider all the essential points while drafting this agreement.

[Also Read: Founder’s Restricted Stock Purchase Agreement]

What Happens in Case of Violation

A well-formatted Founders agreement is extremely useful to solve or avoid disputes and conflict between the co-founders. The worst-case scenario will require to seek justice in the court of law (Block & Rosenberg, 2002). If any of the founders is found guilty, then the other found can drag him to the court due to the breach of contract. A founder may breach to attain higher benefits or to get rid of liabilities. But to take the guilty founder to court, it’s important the agreement includes all the terms and conditions along with details of cost, liability, obligations, and responsibilities (Stepanov,  2000).

The main reason for the formation of founder’s agreement is to avoid ambiguity in future that might arise because of some conflict between the founders, mismanagement in the company or due to obligations (Stepanov,  2000). In order to minimize the impact of misunderstanding or mitigate the conflicts, the founder’s agreement is recommended. But while drafting this agreement expert’s consolation is a must along with all the necessary business requirements.