While a founders' agreement doesn't necessitate formal filing with your local or state government, it remains a crucial document in averting disputes concerning the allocation of new business ownership and delineating the specific relationship between you and your co-founders within the company.

Table Of Contents

• What is a Founders’ Agreement?
• When is a Founders' Agreement Necessary?
• What Should be Included in a Founders’ Agreement?
• How to Draft a Comprehensive Founders’ Agreement?
• FAQs
• Why is a Founders’ Agreement Important?
• What is the difference between a Founders’ Agreement and a Shareholder Agreement?
• Is a Founders’ Agreement legally binding?
• Is a Founders’ Agreement necessary?
• Who are the parties in a Founders’ Agreement?
• Sample For Founders’ Agreement

What is a Founders’ Agreement?

A Founders' Agreement is a legally binding contract crafted by the founders of a business shortly before its official launch. This agreement serves as the blueprint for the company's operations and sets clear guidelines for each partner's responsibilities, roles, and liabilities within the business.

The importance of a Founders' Agreement lies in its ability to demonstrate the founders' commitment and seriousness in establishing a new business venture. It covers a range of critical financial, legal, and contractual aspects that form the core of the business. Here are some key reasons why having a Founders' Agreement is essential:

1. Termination Rules: It outlines procedures for terminating the contract if any business partner wishes to withdraw from the venture, providing a structured and fair process for such situations.

2. Dispute Resolution: The agreement establishes guidelines for resolving both internal and external disputes, promoting smoother conflict resolution among partners.

3. Dissolution Protocols: In the event of a business dissolution, the agreement outlines the step-by-step process for managing and concluding the dissolution, if applicable.

4. Shareholder Protection: It defines protocols to protect shareholders' interests, ensuring that their rights and investments are safeguarded.

5. Attracting Investors: A well-drafted agreement signals to potential investors that the founders are organized, methodical, and committed to maintaining transparency regarding the company's internal structure.

6. Intellectual Property (IP): The agreement addresses the assignment of all intellectual property associated with the business. This prevents individuals from taking critical IP with them if they decide to leave the company suddenly.

7. Exit Strategy: It establishes rules for an exit strategy in case another entity presents an offer to buy the business. This includes addressing issues like succession planning, rights of first refusal, and accelerated vesting.

In essence, a Founders' Agreement is a comprehensive document that not only safeguards the interests of the founders but also lays the groundwork for effective governance, dispute resolution, and future growth of the business. It is a proactive measure that ensures the founders are aligned in their vision and prepared for various contingencies that may arise during the business journey.

When is a Founders' Agreement Necessary?

The use of a Founders' Agreement is not merely optional; it is strongly advised by entrepreneurial experts before embarking on a business venture. This agreement should be thoroughly reviewed and signed by the owner and co-owners of the company to ensure the business's stability and longevity.

From the moment two or more individuals come together with the intention of establishing a business, their first priority should be to safeguard the business's viability. Developing a Founders' Agreement at this stage is not about expecting the worst, but rather about proactively securing the future of the business.

The initial months of a new business venture are typically filled with excitement and optimism. The last thing anyone anticipates is the possibility of the company facing challenges or even collapsing due to unforeseen issues related to ownership and decision-making.

A Founders' Agreement is specifically designed to preemptively address and resolve various aspects that owners and co-owners deem essential. By documenting and agreeing upon these elements, the agreement serves as a vital tool for fairness and conflict prevention, mitigating the risk of misunderstandings or disputes arising in the future.

In essence, a Founders' Agreement is a strategic and forward-thinking step that ensures all parties involved are on the same page and committed to the success and harmonious operation of the business, regardless of potential challenges that may arise.

What Should be Included in a Founders’ Agreement?

A Founders' Agreement is a vital document that outlines the terms and conditions of a business partnership. While the specifics may vary depending on the nature of the business and the founders' preferences, the following key elements should typically be included:

1. Business Purpose and Vision:
   • Define the core purpose and long-term vision of the business.
   • Describe the products or services the business will offer.

2. Ownership Structure:
   • Specify the ownership percentage of each founder.
   • Outline how ownership will be divided among the founders.

3. Roles and Responsibilities:
   • Clearly define the roles and responsibilities of each founder within the company.
   • Explain how key decisions will be made and who holds decision-making authority.

4. Capital Contributions:
   • Detail the initial capital contributions made by each founder.
   • Specify how additional capital will be raised and contributed in the future.

5. Vesting Schedule:
   • Establish a vesting schedule for founder equity to incentivize commitment and long-term involvement.
   • Define any conditions or milestones for vesting.

6. Compensation and Equity Distribution:
   • Address how profits and losses will be distributed among founders.
   • Outline the process for distributing dividends or reinvesting profits.

7. Decision-Making and Dispute Resolution:
   • Define the decision-making process for major company decisions.
   • Include a dispute resolution mechanism to resolve conflicts or disagreements.

8. Exit Strategy:
   • Describe the circumstances under which founders can sell or transfer their ownership stakes.
   • Establish a process for handling buyouts, mergers, or acquisitions.

9. Confidentiality and Non-Compete Clauses:
   • Include clauses that protect sensitive company information and prevent founders from competing with the business during and after their involvement.

10. Intellectual Property (IP) Ownership:
    • Specify how intellectual property developed during the course of the business will be owned and managed.
    • Address the assignment of IP rights to the company.

11. Contributions and Responsibilities:
    • Detail each founder's initial contributions, whether financial, intellectual, or in-kind.
    • Clarify ongoing obligations and commitments.

12. Termination and Exit Provisions:
    • Outline the process for a founder's departure, including voluntary resignation, disability, or death.
    • Define how the departing founder's equity will be handled.

13. Non-Solicitation:
    • Include a non-solicitation clause to prevent founders from poaching employees or customers if they leave the company.

14. Dissolution and Winding Up:
    • Describe the steps for dissolving the business if necessary.
    • Explain how assets, liabilities, and remaining funds will be distributed.

15. Governance and Meetings:
    • Specify how often meetings will be held and the procedures for making decisions.
    • Address the process for amending the Founders' Agreement.

16. Term and Renewal:
    • Indicate the initial term of the agreement and whether it will automatically renew.

17. Legal Jurisdiction:
    • Designate the legal jurisdiction where any disputes will be resolved.

18. Signatures and Execution:
    • Include a section for all founders to sign and date the agreement.

It is crucial to consult with legal counsel or a business attorney when drafting a Founders' Agreement to ensure it complies with applicable laws and regulations and meets the specific needs and goals of the founders and the business. Additionally, the agreement should be reviewed and updated as the business evolves and circumstances change.

How to Draft a Comprehensive Founders’ Agreement?

Creating a founders' agreement can be a detailed and time-consuming process, and it's important to cover all the essential aspects to ensure the smooth operation of your business. Here are some key questions to consider when crafting a founders' agreement template:

1. Business Goals: What are the collective and individual goals for the success of the business?

2. Ownership Distribution: How will ownership percentages be allocated among the founders?

3. Roles and Responsibilities: What are the specific roles, duties, and time commitments of each founder as a company owner?

4. Capital Contributions: What capital will each founder contribute to the business, and how will it be used?

5. Ownership Vesting: Are ownership shares conditional on continuous participation in the business?

6. Performance Obligations: What happens if a founder does not fulfill their obligations as outlined in the agreement?

7. Decision-Making: How will decisions be made within the company? Will it be unanimous, majority, or another voting method?

8. Exit Strategy: What is the process if a founder wishes to exit the business? Can other founders buy their shares, and at what price?

9. Additional Ventures: Are founders allowed to launch other businesses while preparing the current business for operation?

10. Reimbursement: If founders seek reimbursement, what will be the method, and what are the market vesting designations for individual equity if payback is requested?

11. Intellectual Property (IP): How will intellectual property be managed, especially as the business grows and offers proprietary products or services?

Addressing these questions comprehensively in your founders' agreement can help protect your business and ensure all co-founders are aligned in their roles, responsibilities, and expectations.

FAQs

Why is a Founders’ Agreement Important?

This agreement serves as a proactive measure to prevent and resolve disputes that may arise among company founders. By clearly defining the roles and responsibilities of each founder, it establishes an effective management framework and mechanisms for avoiding and resolving conflicts.

What is the difference between a Founders’ Agreement and a Shareholder Agreement?

A Shareholders Agreement primarily comes into play when external investors are introduced to the company. On the other hand, a Founders Agreement is centered around defining the founders' roles, responsibilities, and equity distribution, as well as decision-making authority. It commonly includes provisions related to vesting and exit arrangements for the founders.

Is a Founders’ Agreement legally binding?

A founders' agreement is a legally binding contract that typically exists in written form, detailing the roles, rights, and responsibilities of every owner within a business. It can be a standalone document or integrated into corporate bylaws, an LLC operating agreement, or a partnership agreement.

Is a Founders’ Agreement necessary?

Founder's agreements are essential for startups as they provide clarity on roles, expectations, and rights for each team member while also offering protection in case of any unforeseen issues.

Who are the parties in a Founders’ Agreement?

A founders' agreement is a formal contract or legal agreement entered into by a company's co-founders during the business's establishment.

Sample For Founders’ Agreement