What is a founders’ agreement?
Starting a new business can be an exciting and anxious time.
There’s a lot to do, and some things inevitably get overlooked. One such example is formalizing your and your partners’ roles within the company.
New businesses are often started by people with previous relationships.
Families or friends go into business all the time. This may make them feel a contract is unnecessary.
This is a mistake. Circumstances can change.
What happens if one of your partners has to leave the company? Will you have to buy them out? What will happen to any intellectual property?
That’s where a founders’ agreement comes in.
What is a founders’ agreement? It’s a legal agreement between the founders of a startup business, which lays out each individual’s role and responsibilities.
What is a founders’ agreement?
If you’re hoping for a founders’ agreement definition, the best way to describe it is as a legally-binding contract that formalizes the obligations and liabilities of the founders of a business.
Ideally, you should draw this up prior to launching your joint venture. The agreement should define the founders’ functions and clarify their individual responsibilities.
A founders’ agreement acts as a guide in the event of a founder leaving the company.
A well-written one will leave you in no doubt as to who gets what, setting out how to divide equity among the remaining founders after the fact.
Additionally, it should detail what will happen to any intellectual property.
Why & when do you need a founders’ agreement?
We’ll begin with the “when”. A founders’ agreement ought to be in place before the startup begins operating.
That’s so each founder knows their role and duties before the business is up and running.
This is vital if you want to attract investmentfrom outside sources (otherwise, investors may fear any situation that could lead to acrimony, as this could put their investment at risk).
The founders’ agreement should set out rules and a framework for dealing with disputes.
You should include the fact that you have an agreement in place in any business proposals.
This will reassure potential investors.
“Acrimony? My partners and I have been friends since college! There’ll be no acrimony,” we hear you say.
But there’s a lot at stake when founding a startup. It may be uncomfortable to think about, but money can have strange effects on decision-making.
That’s another reason why a founders’ agreement is so useful.
You and your co-founders can avoid any disputes down the line by ensuring matters are legally documented upfront.
Your agreement should outline what will happen to shares in the business if one of you has to leave.
For example, you and your other owners will be granted first refusal. It should also dictate what happens to the ownership of intellectual property in this situation.
Finally, it should set out rules around decision-making. For example, by specifying any matters that must be decided by all the co-founders.
This prevents surprises resulting from one founder deciding to do something without consulting the others (for example, taking out a loan).
What should be included in a founders’ agreement?
The contents of a founders’ agreement can vary.
Essentially, it should cover matters applicable to your business and that are important to you and your co-founders.
The items listed below are typically included in a startup founders’ agreement:
- The proposed name of the company
- The names of the founders
- The share of equity held by each founder
- The amount of capital invested by individual founders
- Details of any third-party investments
- Duties and business roles for each founder
- A framework for resolving disputes
- Vesting provisions
- Clauses governing the sales of shares
- The name of the jurisdiction that legally governs the agreement (i.e., the country or state)
- Signatures (written or electronic) from each co-founder.
What are some founders’ agreement examples?
The tone of a founders’ agreement should be formal and clear.
It’s a legal document, and you should write it in a way that reflects this. Let’s look at some examples of how to write a startup founders’ agreement.
You should begin with the names of the co-founders and the proposed name of the business, i.e:
“We, the undersigned, namely John Palmer, Avi Pradesh, and Fiona Evans, agree to establish a company together. The venture will be known as System Solutions.”
You should also include a clause that deals with intellectual property:
“The undersigned agree that all technology and intellectual property associated with the business is owned equally by the co-founders. Any change in ownership of technology or intellectual property must be agreed by mutual consent.”
The agreement should take account of the initial investment required of the founders, too:
“The undersigned each agrees to contribute $50,000 in cash to cover initial startup expenses. The co-founders understand this is a non-refundable investment and that their capital is at risk.”
The above examples should provide a taste of how to write these agreements.
Clauses should leave little room for maneuver.
Start your partnership like this, and you reduce the risk of misunderstandings down the line.
Get your founders’ agreement template from PandaDoc
It’s easy to draw up a contract using a founders’ agreement template.
This comes complete with all the sections that are typically needed and is fully customizable to boot.
It even contains useful tips to ensure your agreement is fit for purpose.
Sign up to PandaDoc today or schedule a 15-minute demo to find out more about how we can help with founders’ agreements and other critical documents!