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The Advantages Of A Founders Agreement

Finding out the type of business entity:

he founders' agreement will clearly mention the nature and type of entity that should be established by the co-founders thereby setting the proper path to be followed.

The outline of business plans:

This agreement describes the vision and mission of the entity and sets the short term and long term goals to be achieved over a period of time.

Determining the roles and responsibilities:

Obviously, there will be overlapping roles and functions between co-founders without having a proper framework of the assigned roles. Therefore, it is important to designate the roles and responsibilities of the co-founders, in accordance with their area of mastery like marketing, operations, finance, etc.

Ownership structure :

The founder's agreements will clearly specify the structure of ownership pertaining to the initial contribution made by the cofounder or the percentage of the equity shares held by the cofounder in case of a company, thereby avoiding any future conflicts in between them.

Decision making:

At a certain point in time, there will be an ideological conflict between co-founders, So these conflicts are to be handled through the proper decision-making process. Here the founders' agreement will formulate a procedure to be followed during the decision making process. If the voting system is adopted, then it should define the value of votes for each founder and provide a solution in case of a deadlock situation.

Provisions for compensation :

This agreement laid down the scheme of compensation to be carried out, if anyone of the cofounder has violated the provisions mandated. Here, the proportion of the compensation to be made will be mentioned for every cofounder.

Expulsion of co-founders:

Any co-founder can be evicted from the company for indulging in fraudulent activities like misappropriation of funds, sexual harassment, and getting employed with other organisations. This agreement ensures a proper structure on how to deal with these situations and sorting out appropriate funds to be reverted to the expelled co-founder.
 

Secrecy & Confidentiality:

There was a separate clause on confidentiality in the founders' agreement, which makes an obligation for founders to not reveal the secrets of the business.

Checklist: key provisions of the Founder’s Agreement

Equity ownership:

One of the most important provisions of a founder’s agreement is demarcating the equity ownership of each of the co-founder of the company. This equity ownership will be determined by considering the various factors like money invested, exposure, etc. This evaluates the jurisdiction of the voting rights of each co-founder.

Shares Vesting

If any one of the founders exits from the company, a proper pattern of vesting the shares should be ruled out in the agreement. The vesting of shares can be done in two ways, they are;

Time-based vesting: 

Under this method, the shares of founders will be vested in proportion to the span of years invested by them. If any of the founders have been relieved or ousted from the company before the expiry of his/her term, then the outstanding shares will revert to the company. Here, the performance of the founder will not be taken into consideration.

Milestone vesting: 

Under this method, the shares will be vested with respect to the milestone achieved by the company. If the founder exits the company before achieving this milestone, then the shares of the aforementioned founder will not be vested with him/her.

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Constricted transfer of shares:

This agreement should have another important clause related to the restricted transfer of shares of the founder. It may provide a clause of the lock-in period, which mandates the founder not to transfer his/her shares for a certain period, before the expiry of his/her term. Similarly, the method of valuation of the shares of the founder should be sorted out, before the expiry of his/her term.

Allotment of intellectual property:

The innovative ideas or inventions created by the person enjoy the benefits arising from it, and it remains the property of his/her. So here, the agreement should explicitly state that the intellectual property rights developed by the co-founders are allocated or owned by the company. and on the occurrence of any issues, it cannot be entertained by any individual.
Most of the companies will obtain intellectual property, initially in the name of co-founders. Later, it is assigned to the name of the company. The valuation of the company is determined by the intellectual property, including the clause in the agreement which will avoid future disputes.

Restraint on trade:

An agreement should be made in the form that no founder should indulge in any of the activities which conflict with the objective of the company. For instance, if any of the founders have decided to relieve themselves from the company then he should not engage in any competitive business for a stipulated year from the date of exit.

Terms of employment of co-founders:

The employment of co-founders should be full-time with the company. This agreement should elucidate the terms of employment, their roles, compensation, and benefits of each founder. There might be separate contracts regarding the terms of employment among co-founders, including their perks and benefits.
 

Dispute resolution

In case of any dispute arising between the co-founders, there should be an appropriate mode of dispute resolution mechanism, to be present. For example, if founders mutually agree to terminate the company, then the most preferred option for resolving this dispute is arbitration, mediation, etc.

 

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.