What is a Founders Agreement?
A Founders Agreement is a legal document created between the co-founders of a business at the early stages of the venture. This agreement outlines the ownership structure, roles and responsibilities, and various operational aspects of the company.
A Founders Agreement is a foundational framework for how the business will be run, how decisions will be made, and how disputes among founders will be resolved.
The main advantage of having a 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.
- Making projections.
What is the importance of the Founders Agreement?
The importance of a founders agreement lies in its ability to preemptively address potential disputes and misunderstandings by clearly defining the terms of the partnership, including decision-making processes, equity distribution, and procedures for handling the departure or addition of founders.
This clarity and foresight can be invaluable in ensuring the smooth operation and governance of the business, particularly in its formative stages.
One key component often included in Founders Agreements is a share vesting agreement.
What are the things to include in a Founders Agreement?
When drafting a Founders agreement, it is important to focus on a number of key clauses.
- Ownership Structure: Details on the percentage of ownership each founder has in the company. This is usually based on the contribution of capital, resources, or intellectual property each founder brings to the business.
- Roles and Responsibilities: Clear definitions of each founder’s role within the company, including job titles and descriptions of duties. This helps prevent overlap and ensures that all critical business areas have dedicated oversight.
- Capital Contributions: Information on the initial capital contributed by each founder and any future expectations regarding financial contributions.
- Vesting Schedule: A schedule that outlines how and when the founders will earn their equity in the company. Vesting schedules prevent situations where a founder leaves the company early on but retains a significant equity stake.
- Decision Making: Guidelines for making business decisions, including day-to-day management and strategic direction. This section may specify voting rights and what constitutes a majority decision.
- Dispute Resolution: Mechanisms for resolving disagreements between founders to prevent deadlock situations that could harm the business.
- Exit Strategy: Provisions for what happens if a founder wants to leave the company, including how their equity is handled and whether they can be bought out.
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.
Do founders get restricted stock?
Founders do get restricted stock, but they are usually vested over a period of time. Founders use restricted stock to ensure continued contribution by all founders for the corporation. Additionally, the company has the right to repurchase any unvested shares at their original issuance price upon termination of employment or during departure.
Conclusion
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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