Starting a business is an exciting and challenging journey, and it’s important to have a solid foundation in place from the very beginning. One crucial aspect of this foundation is a founders agreement.
What is a Founders Agreement?
A founders agreement is a legally binding contract between the founders of a business, which is often entered into before the startup company is incorporated. It outlines the roles, responsibilities of each founder, as well as ownership of intellectual property developed for the business and the rules and procedures for decision-making and conflict resolution. Most importantly, it outlines the division of ownership between the founders, which will become shares in the startup when it is incorporated, and any agreement in relation to the vesting of ownership / shares. Founders agreements are typically created at the early stages of a startup, when the founders are still on good terms and have a clear understanding of their roles and expectations. This document serves as a roadmap for the business and can help prevent conflicts and protect the interests of all parties involved, particularly by protecting the business in the case of the departure of a founder.
Sometimes a founders agreement is put in place a later stage, alongside a shareholders agreement, to document arrangements between the founders relating to vesting of shares and rights of first refusal to purchase shares.
What Should be Included in a Founders Agreement?
A founders agreement should cover the following key areas:
Ownership and Equity
One of the most important aspects of a founders agreement is the ownership / shareholdings of each founder. This includes the percentage of ownership, vesting schedules and any conditions to the issuing of shares to a founder.
It’s important to clearly define these details to avoid conflicts and ensure that everyone is fairly compensated for their contributions to the business.
Roles and Responsibilities
The agreement should also outline the roles and responsibilities of each founder. This includes the day-to-day tasks, decision-making authority and any specific responsibilities or areas of expertise.
Defining these roles and responsibilities can help prevent conflicts and ensure that everyone is clear on their duties within the business.
Decision-Making and Conflict Resolution
A founders agreement should also include the rules and procedures for decision-making and conflict resolution. This can include how decisions will be made, who has the final say and how disputes will be resolved.
Having these guidelines in place can help prevent conflicts and ensure that decisions are made efficiently and effectively.
Intellectual Property Rights
Intellectual property (IP) is a valuable asset for any startup, and it’s important to have clear ownership and usage guidelines in place. A founders agreement should outline who owns the IP created by the founders in their work for the business, which will usually be the startup, as well as any restrictions or permissions for its use.
Non-Compete and Non-Disclosure Agreements
To protect the interests of the business, a founders agreement should include non-compete and non-disclosure agreements. These clauses prevent founders from sharing confidential information or competing with the business during and after their involvement with the startup.
Termination and Exit Strategies
While no one wants to think about the end of a business, it’s important to have a plan in place in case things don’t work out. A founders agreement should include termination and exit strategies, such as buyout options or procedures for dissolving the business and the ownership of any IP in those circumstances.
The Difference Between a Founders Agreement and Shareholders Agreement
While there may be some overlap in the content of founders agreements and shareholders agreements, the main difference lies in their scope and focus. The shareholders agreement is broader and involves all shareholders, not just the founders, while the founders agreement specifically addresses the needs and concerns of the founding members of the company.
Book a free legal consultation to discuss your Founders Agreement
A founders agreement is a crucial document for any startup, and it’s important to have one in place from the very beginning. By clearly defining roles, responsibilities, and ownership, as well as outlining decision-making and conflict resolution procedures, a founders agreement can help prevent disputes and protect the interests of all founders and the business. If you are looking for advice on a founders agreement, a good place to start is by booking a free legal consultation with a commercial solicitor from JPP Law.
