Founders Agreement: All You Need To Know About

The founders’ agreement, is a written instrument that outlines the allocation of responsibilities among the company's founders and the period required for the shares to completely vest. It also highlights the founding members' responsibilities and roles, invested equity, different ventures, and plans and aspirations. It is drafted during the first incorporation of the company.

The objective of a founders’ agreement is to avoid any future ambiguity regarding the company's administration and business relationships between the founders. The agreement identifies potential issues and hazards and procedures for dealing with them if they occur. It must be thorough and free of gaps that could be abused later as a legally enforceable instrument. After receiving expert advice on the business's objectives and aspirations, it's always a good idea to establish a written agreement.

What is a Co-Founders’ Agreement?

Like any other contract, a co-founders agreement serves in the day-to-day operations of the founders and aids in resolving disagreements in the event of a dispute. The co-founders' agreement can be rendered legally enforceable as a document by simply printing it on non-judicial Stamp paper, which must be formally signed by the parties concerned and accompanied by the relevant stamp duty, which varies by state.

A co-founders agreement is a legal contract that lays out the terms and conditions under which a startup's co-founders will conduct business. This agreement protects the co-founders in the event of a conflict. The lines of business must be considered while drafting a co-founders' agreement. All provisions relating to the factors for which the co-founders will be accountable must be included. This contract can prevent the founders from becoming confused in a change in circumstances, whether psychological or financial. This agreement must be precise, thus it is best to hire a lawyer or a firm to assist you in creating it properly.

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Essential Terms in Co-Founders’ Template:

• Roles & Responsibilities: Within a company, assumptions regarding individual roles and responsibilities can be a major point of conflict. Don't be afraid to spell out each person's responsibilities. These expectations can be as straightforward as one person running the company while the other stays a silent partner.
• Confidentiality: If any founder contributed personal funds to the firm, your foundersagreement should state that, as well as the terms for capital use. Your agreement should also include a basic secrecy clause to demonstrate commitment and preserve sensitive company information.
• IP Assignment: You've started creating intellectual property if your company develops a business plan or starts expanding on a platform or product. To safeguard your ideas, designate what belongs to your organization and how it will be used responsibly. It's critical to establish how IP belongs to your organization rather than to people like owners, workers, contractors, and consultants.
• Vesting: Instead of earning equity rights immediately, vesting establishes the requirements that co-founders must achieve to receive their company share. Vesting typically requires founders to labour for a particular amount of time or accomplish certain milestones before their ownership becomes available. Co-founders with vesting arrangements are more likely to stay actively involved in and dedicated to the startup. The most usual vesting duration is quarterly for four years, with a one-year cliff at the end. This means that the vesting schedule will not be applied for the first year. Even though time-based vesting simply assesses the quantity of time, not the quality of work, most founders choose to incorporate one in their FAs.
• Decision Rights: Most entrepreneurs base their decisions on their prior experience, positions, and expectations. Perspectives aren't always in alignment. Conflict can arise when there is no clear path to decision-making. A technical co-founder, for example, might set a one-year objective for product development. In contrast, a business-minded co-founder would wish to assure investors that the product will be ready in six months. Given that decisions influence the same set of resources, who has the authority to overturn which decision?
• Time & Interest: It's crucial to consider if each founder would work full-time or part-time. For example, in an early-stage company, one co-founder might work full-time on the venture while also working half-time elsewhere. Maintaining a role in another company reduces the founder's risk, because many founders want to be able to take advantage of possibilities outside of the startup—as investors, consultants, and so on—you'll need to agree on basic time concerns. How many hours does it take to work full-time? If one individual works 40 hours per week while the other works 70 hours per week, disputes will develop.
• Buy-outs: What happens if the founders aren't getting along? In some circumstances, one founder no longer likes to work with the other founders, or one founder is not carrying his or her weight, and the other founders believe that continuing is unjust. One of the features that many founders’ agreements lack is a clause that covers what happens if the founders break up, whether by ejecting one or more founders from the company or by dissolving the venture as a whole since no one can get along.
• Exit: Exit clauses enable a co-founder to sell his/her shares and exit the startup/company. Typically, clauses such as tag-along and drag-along are included in the Founders’ Agreement to protect the interests of majority shareholders.

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A Co-Founders’ Agreement is not legally mandated but a commercially sensible decision. It always helps to have all duties, rights and obligations captured in writing to prevent future disputes. A co-founders’ agreement is the beginning of a commercial relationship between startup founders and one should always engage counsel to draft the same, as the terms may be complex and may carry inherent future risks if drafted incorrectly.