Founders Agreement in Startups
Founders agreement outlines the responsibilities, roles, and rights of every owner in a company.
Almost everybody wants to become their own boss and step foot in the entrepreneurial landscape. Many are even fortunate enough to do so, but face a plethora of troubles in their journey. If you are planning to set up your own company, but want to avoid the hassles and roadblocks that many fresh entrepreneurs tend to face, make sure that you know about the legal requirements necessary for running an organization the right way.
It’s no secret that there are a ton of things that go into launching a company. Because of this, many entrepreneurs tend to forget to create a founder’s agreement. There are even some cases where people knowingly delay drafting this agreement because they are friends with the co-founders and trust them. Sure, you may trust your buddy, but drafting this agreement will keep you safe in case things go sideways.
What is a Founders Agreement?
At its very core, a founders agreement for startups is a contract that legally binds a company’s founders, often in writing. It outlines the responsibilities, roles, and rights of every owner in a company. Traditionally, a founder’s agreement is a standalone document. However, some organizations take the extra step and implement it into their LLC operating agreement, corporate bylaws, and even partnership agreements.
It offers protection to the interests of each founder, ensuring they don’t have to face conflicts later on. If you happen to be an entrepreneur with a once in a lifetime idea, hitting the brakes feels almost impossible. It is a major reason why founders are afraid of slowing down, as they believe they will miss their window of opportunity.
Sometimes, however, you really have to take a deep breath, pause, and ensure you are not missing essential details before proceeding. This is particularly important for completing any legal tasks on your list, so that you can safeguard your business in the present and the future.
If you intend to run a company with co-founders, it only makes sense to draft a detailed founders agreement. In many cases, entrepreneurs tend to choose an online legal service or an experienced business lawyer to create this agreement. However, you can draft a simple founders agreement by yourself too.
Why is Founder Agreement Important?
As mentioned before, this type of agreement offers companies a baseline for the relationships with the cofounders in the present day and the future. What’s more, this agreement also creates a solid foundation for your organization’s overall structure and what the owners will provide to the business. No matter which type of business you plan to run, having this agreement in place is vital for its longevity.
Contrary to popular belief, this agreement is totally optional, but running a business without it is likely to cause more harm than good. It essentially provides insurance against several unexpected scenarios that you would otherwise not be equipped to deal with. It prevents you and your cofounders from hurting the organizations down the line by keeping every procedure, rules and regulations upfront.
While many people draft their company’s agreement months or even years after their company becomes operational, it would be best not to go that route. Instead, you would be wise to formulate this document as soon as your business idea becomes a reality. However, if you already started your business and passed that time – well, it’s better late than never. It will give you a firm grip on the present happenings of the company while also protecting it in the future.
Let us discuss some reasons that prove why a founders agreement is a must:
- It shows investors and cofounders that you are serious about your business
- A founders agreement is vital for protecting minority owners
- This agreement offers clarity when or if a partner decides to exit or enter the company
- It offers a solid structure for clearing up disputes and quarrels among founders
- The agreement clarifies the co-founder’s roles in the company
Entrepreneurs and lawyers are well aware of the fact that this agreement offers an early assessment for how the company is running and its overall state during its primitive years. In case things change after the passage of time, it’s not a major deal. Why? Because most agreements provide alternative solutions for various scenarios.
What’s included in the Founders Agreement?
Founders’ agreements do not have a formal, set structure. If you are planning to draft a founders agreement by yourself, or don’t know what to add, here is a list of things that will help you create a solid agreement that your co-founders will agree with:
- Name of Founders and Company – This part is non-negotiable, as the first thing to do when drafting a shareholder’s agreement is to write the company’s and its founder’s names. Sure, you may be planning to change the business’ name later one, but it’s important to jot down the current name to ensure you can get going. Many fresh entrepreneurs tend to overestimate how important it is to get the name right. In some cases, it can even feel harrowing. However, a well-chosen name can be a game changer and can take your organization to great heights.
- Company Goals – Your company’s goals could include short and long term goals like, estimated sales, the types of products you plan to sell, the target market, and others. Recording and predicting how you plan to operate the company is a crucial step that could lay a robust foundation for your business. This portion could also be a great place to record your organization’s values, culture, priorities etc.
- Ownership Structure – The ownership structure is where you have to gauge the percentage each member and cofounder will receive. This figure is always subject to undergo changes as more individuals join and leave the company. In case your organization is a limited liability company, it would be best to determine the management interest percentage owned by each member. This means that you will need to find out whether or not each person owns the company in an economic way or if they have a bigger role in its management.
- Initial Capital and other Contributions – It goes without saying that each founder in your organization made some sort of contribution to become its founder. The contribution could be in the form of a promissory note, property, cash, services rendered, or even a combination or promise of everything. If a cofounder decides to offer anything other than cash, it would be best to determine its monetary value and detail it in the founders agreement. You must also figure out if the member’s contribution will continue in the future or if they are only making a one-time investment.
- Roles and Responsibilities – While it may seem that agreeing upon responsibilities and roles verbally is effective, it really is not. If anything, it only leads to disputes down the line. You can easily avoid situations like these by mentioning each founder’s role in detail after discussing it with them. Once everybody knows their responsibilities and control over how the company operates, running the company becomes a smooth, hassle-free process.
- Equity Ownership and Vesting – You must also list the agreement with vesting, equity, shares, etc., and how they will be governed. This is important as it clears ambiguity and gives everyone a clear idea of their entitled equity. This part may require a lot of technical detail to allow everyone to understand how you divided the vesting and equity ownership, providing every owner their fair share.
- Intellectual Property– Intellectual property is essentially what makes your startup different/unique from others. It could be something as simple as a logo, design, blog post, IP, or a product offering. No matter what it is, mention it in your founders agreement to make sure you can steer clear from unnecessary lawsuits and quarrels.
- Salary and Compensation – Determining whether the compensation or salary you are giving your co-founders, and most importantly, yourself can be a challenge. Every company has a different compensation structure, and there’s a high chance that your salary structure is different as well. Instead of having a rough idea about how your organization’s compensation works, writing it down in your founders agreement would be a wise choice.
- Exit Clauses – Each founder’s agreement should discuss exit-related circumstances. There are tons of cases where co-founders decide to leave a company all of a sudden, which causes a lot of troubles to other founders. A founders agreement should list down the solutions for possible events and cases when someone leaves a company, helping members deal with such issues with efficiency.
- Validity of Agreement – The last thing you want to do is create an agreement by yourself, without brining other founders or investors in the loop. It is a surefire way to create disharmony and leads to tons of issues. In addition, you must also make sure to discuss the agreement’s validity with the shareholders, deciding when it would be subject to revisions and amendments in the future.
Founders Agreement Sample
As mentioned before, a founder agreement template can be quite different, depending on the company. This is why each document is different. However, there are common elements in every founders agreement sample, and it is a good place to start for those who are new to this document. Fortunately, there are tons of founders agreement template available online, that can help you get started. Here is an example of a Founders’ Agreement template.
Do not worry about your document’s final language as you can always get a professional to comb through the details. As long as you mention the important information you want to address, you will be good to go.
Recording Founder Agreements on Eqvista
With the importance of creating founders agreement for the company is, recording and sharing it with all parties is also crucial. This is where Eqvista comes in. Our Cap Table software is built to efficiently store and share company documents along side share issuances. This process will save you time in maintaining your up to date Cap Table and company documents to support this.
Here is how the Cap Table would look on the Eqvista platform.
In this case we would have 4 founders of the company, each with their own shares and ownership percentages. Now in the platform, companies can easily upload and share access to these documents with the founders, lawyers, accountant, or other parties.
In addition to storing your documents on Eqvista, you can also edit these documents in real time, or download and save them for later.
Interested to Use Founders Agreement?
A founder’s agreement does not become legally binding if it doesn’t have the signatures of every owner. Provide everyone with enough time to go through the document, ensuring they agree with it before getting them to sign. Now that you know what a startup founder’s agreement is, drafting one and understanding how it works won’t be an issue, its time to start implementing it for your company and recording it.
Eqvista is a sophisticated equity management system designed to record and store everything related to shares for your company. You can easily process share issuances and their grants all from one place. Even board resolutions can be handled online including the necessary approval process. Read about our entire list of support articles here.