Overview of a Pre incorporation Founders’ Agreement
What is a Pre-Incorporation Founders Agreement?
A Pre-Incorporation Founders Agreement is a contract among the founders of a company that explains the rights, responsibilities, liabilities, and obligations of each founder towards the company before starting its operation.
The main advantage of having a pre-incorporation founders’ agreement is protection against financial liability for company actions. Drafting a Founders’ Agreement involves envisioning a venture, sharing passions and ambitions, negotiating, experimenting with business cases for various issues, and making projections.
What is the importance of the Pre-Incorporation Founders Agreement?
A pre-incorporation founders agreement helps to settle down the disputes if arise in the future due to the difference in opinion of each founder. It will also protect the legal rights of each founder in case of any dispute, which ultimately leads to the smooth operation of the business. Furthermore, it clearly explains the roles and responsibilities of each founder and helps to create a good corporate environment in an organization.
What are the things to include in a Pre-Incorporation Founders Agreement?
When drafting a Founders agreement, it is important to focus on a number of key clauses.
Project Description: Having a clear and understandable project description in the founder’s agreement helps to set up a road map for the future operation of an organization.
Capital contribution of each founder: While starting a partnership firm it is very important to mention the share or contribution of each founder in an organization.
Percentage of shares to be held by each founder: A founders agreement contains information regarding the number or percentage of shares held by each founder. This will help to determine how much stake each founder has in a company.
Remuneration of Founders: In a partnership firm there might be chances that some of the partners want to be in a passive state and enjoy the benefit of total profits and dividends. However, partners that are actively working in their business should get paid, and the details regarding the remuneration of founders should be included in a pre-incorporation founders agreement.
Role of each founder: The roles and responsibilities of each founder should be clearly written in a founder’s agreement for the smooth operation of the business. What happens when one founder wants to exit the company and what happens to his or her shares: If any one of the founders decides to quit the company, the information regarding appointing a new partner and the shares owned by that partner should be clearly written in a founder’s agreement to avoid any mis-confusion in the future.
Whether the founders are restricted from competing with the business of the company after they exit: This clause explains that if any one of the founders decides to leave the company, he/she should not compete with the existing company in any form or manner.
How the company’s confidential information and intellectual property will be protected: Protection of company financial information is a top priority for any organization. So, clear information regarding the protection of confidential information while one of the partners leaves the company should be clearly mentioned in the founder’s agreement.
Is a founder’s agreement legally binding?
A founder’s agreement is legally binding because it protects the legal rights of each founder by clearly describing the roles and responsibilities of each founder. A founder’s agreement also acts as a dispute resolution mechanism in case it arises in the future.
Whether you’re hoping to go public or starting a modest company with a few close friends, a Founders’ Agreement is a great first step for your business. It will help you provide the foundation to your business by outlining expectations, guiding decision-making, and reducing risk. In one simple document, you’ll be able to establish important rules that will set the stage for how you will run your business. Without a clear understanding of how you will work together, things can get messy quickly.
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