Founders Agreement

A Founders Agreement is a crucial legal document that outlines the terms and conditions between all the co-founders of a company. It covers aspects such as ownership, rights, responsibilities, dispute resolution, and other essential terms that govern the relationship between the founders and the company. This agreement is often the result of open discussions, ensuring that the founders are aligned in terms of their expectations, goals, and concerns. It helps minimize the risk of potential conflicts as the business evolves.

Package Inclusions:

• Assistance in drafting the Founders Agreement
• Document preparation
• On-call consultation to discuss the Business Plan

Key Terms of the Founders Agreement

1. Equity Ownership
   A crucial aspect of the Founders Agreement is determining the equity ownership for each co-founder. This is usually based on factors such as financial investment, intellectual property, experience, and industry network. Equity ownership also determines the voting rights of each co-founder within the company.

2. Vesting
   The Founders Agreement should include a vesting structure, which defines how and when founders earn their shares in the company. There are two main types of vesting:

   • Time-Based Vesting: Shares are vested over a period of time, typically starting after 6 months or a year. If a founder leaves before completing their term, they forfeit their remaining shares.

   • Milestone Vesting: Shares are vested upon the completion of agreed-upon milestones. If a founder leaves before these milestones are reached, they lose the unvested shares.

3. Separation of Roles & Responsibilities
   The Agreement should clearly define the roles and responsibilities of each co-founder, typically covering areas like operations, administration, marketing, and finance. This ensures that each founder understands their specific duties within the company.

4. Limitation on Transfer of Shares
   The Agreement may include clauses that restrict the transfer of shares by the founders, such as a lock-in period. This protects the company's ownership structure. A "right of first refusal" may be included, which allows the other founders or shareholders the first opportunity to buy shares before they are sold to outsiders.

5. Intellectual Property Assignment
   The Agreement should ensure that all intellectual property (IP) created by the founders during their association with the company is assigned to the company, not retained by the individual founders. This could include patents, trademarks, domain names, and other IP. The Agreement should clearly state that the company owns any IP developed by the founders while working for the company.

6. Confidentiality
   Founders will have access to confidential or proprietary information about the business. To protect the company’s interests, the Agreement should include confidentiality clauses that prevent founders from disclosing sensitive information, which could harm the company’s reputation or operations.

7. Future Financing
   The Founders Agreement should outline how future financing will be handled, including whether the founders will contribute more funds as debt or equity. It should define how equity will be valued and what interest rates will apply if financing is through debt. This section ensures that the company's growth is supported by clear financial guidelines.

These key terms help lay a strong foundation for the company's governance and minimize potential disputes as the business grows.

Documents Required for Drafting a Founders Agreement

1. Certificate of Company Registration
   The official registration certificate of the company.

2. Intellectual Property Rights Documents
   Any relevant documents related to intellectual property owned or developed by the company or its founders.

3. Share Subscription Documents
   Records detailing the subscription of shares by the co-founders and their respective shareholding.

4. Company Contracts and Agreements
   Existing contracts, deals, or agreements that the company has entered into, which may affect or relate to the founders’ roles and responsibilities.

How to Create a Founders Agreement?

Creating a Founders Agreement involves several steps to ensure all key aspects are covered. While these steps aren’t legally binding on their own, they serve as a solid guide to structure the agreement effectively.

Step 1: Select a Template
There are many templates available online for Founders Agreements. Choose the one that best suits your startup, or customize it by combining elements from different templates. The goal is to create an agreement that aligns with the needs of you, your co-founders, and your startup.

Step 2: Complete the Simple Sections
Start by filling out the sections that are straightforward, such as names, company location, the start date of the business, and the company name (if already decided). These sections typically do not require input from all co-founders.

Step 3: Address the Complex Issues
Next, tackle the more challenging discussions. This is when you and your co-founders will need to address crucial matters like equity ownership, compensation, roles, and responsibilities. It’s important to approach these conversations with a professional mindset—remember, it's a business matter, not personal. These discussions might take time, but it's essential to reach a conclusion by a set deadline to prevent indefinite delays.

Step 4: Seek Professional Legal Advice
It’s wise to consult a tax expert for advice on the tax-related aspects of the agreement. Additionally, it’s highly recommended to have a lawyer review the Founders Agreement to ensure it is legally sound. A legal professional will catch any potential issues and ensure that all formalities are followed, safeguarding the interests of all parties.

Step 5: Get a Second Opinion
In addition to legal advice, consider seeking feedback from a fellow entrepreneur or business advisor. They might offer valuable insights based on their own experiences, highlighting aspects that even a lawyer might miss. A second opinion can help refine the agreement and make sure it’s as thorough as possible.

Step 6: Final Review and Sign
Once all co-founders have had time to review the agreement and consult with their lawyers, finalize the document by signing and dating it. After it’s signed, the Founders Agreement becomes legally binding. Ensure that you store a digital copy with everyone’s signatures for future reference.

This structured approach ensures that all necessary components are covered, creating a strong and clear Founders Agreement for your startup.