A founders’s agreement is a legally binding document you can compose with other cofounders to prevent conflicts regarding the distribution of new business ownership. It outlines the specific affiliation between you and your other founders.
Is a Founders' Agreement Legally Binding?
If all parties sign this contract and it follows the laws of the established governing state, a court of law will uphold it if a dispute or disagreement arises.
What Is a Founders’ Agreement?
A founders’ agreement is a contract cofounders establish before launching their company to define each partner’s roles, responsibilities, and liabilities. It also lets you set guidelines for ownership distribution and decision-making.
Even if the founders know each other well before entering into business together, it’s still a good idea to put their professional relationship into writing. It shows they’re serious about launching the business venture and promotes transparency about the agreed-upon terms.
Founders' Agreement vs. Shareholders' Agreement
A founders’ agreement and shareholders’ agreement have a few key differences. For example, shareholder agreements are only for corporations, while founders’ agreements can be for all business entities, including limited liability companies (LLCs), limited liability partnerships (LLPs), and corporations.
These documents also differ in their purposes. Founding members write a founders’ agreement at a business’s inception to focus on the company’s initial arrangement. Alternatively, a shareholders’ agreement evolves as the company grows and addresses all shareholders’ rights and responsibilities.
When to Use a Founders’ Agreement
You can use a founders’ agreement when you’re:
- Starting a new business: When two or more individuals decide to create a business together, they can draft this document to protect the viability of their company. It defines the terms of the collaboration from the beginning, which clarifies expectations and minimizes conflicts.
- Addressing fundraising: When founders start a business, they might be unable to supply all the necessary funds and resources. They can establish a framework for handling issues relating to investor rights and dilution (reducing existing shareholders’ ownership when the business issues new stock). This clarification can help them seek external funding with ease.
- Planning for the future: A founders’ agreement can help the founding members anticipate future needs, as they can address processes like hiring key executives and engaging in future financing rounds. They can also record expansion plans and refer to them as the company grows.
- Outlining exit strategies: Even if no cofounders plan to leave the business soon, they can still define the processes for transferring ownership if one cofounder has to exit unexpectedly. They can also outline the compensation structure for cofounders who leave the venture. For example, a departing founder may receive any positive capital account balance within several months after resigning.
A founders’ agreement preemptively addresses and resolves any issues that the owner and coowners want to document and agree on for fairness and to avert the risk of future misunderstandings.
What to Include in a Founders’ Agreement
Here are some key elements to include in a founder agreement:
- Business Name and Concept: Include the business’s name and concept, which refers to the project the cofounders will pursue.
- Ownership Structure: Write each founder’s name, the number of shares they’ll own (their ownership interest), and their equity percentage.
- Founders’ Rights: Detail the founders’ rights, including their rights to vote on specific issues or buy back shares for several months after resigning from their position.
- Founders’ Duties: Record each founder’s main tasks and responsibilities, as each person will have different strengths and skills they can contribute to the organization.
- Founders’ Time Commitment: Outline the time each founder will commit to the business. Some may work on a full-time basis, while others may work on a part-time basis. Specify the number of hours each part-time founder will work per week.
- Decision-Making Processes: Each founder may have expertise in a different area, so a founders’ agreement can determine which individual will be responsible for making decisions regarding specific matters or topics.
- Initial Capital Contributions: Explain how much capital each founding member will contribute to the company’s initial expenses. Describe the initial contribution and record its total value if it’s not monetary. Explain how the business will use each contribution to advance its cause.
- Vesting Schedule: Record how long it takes for a founder to become fully vested in the company, meaning how long it takes to receive full ownership of specific assets. State whether the company will award compensation at fair market value.
- Dispute Resolution Procedures: As a business conducts its operations, it may encounter disagreements. Define how you and your co-founder want to address disputes, whether through institutional arbitration of law, the state’s courts, or mediation.
- Termination Procedures: Specify that all parties can terminate this document with mutual written consent. If no one initiates early termination, you may define the agreement’s termination after a specific period.
- Additional Clauses: You may include other clauses, including non-competition, non-solicitation, confidentiality, and related intellectual property clauses.
- Governing Law: Name the state that will govern the entire agreement.
How to Write a Founders’ Agreement
Step 1 – Discuss All Priorities With Your Cofounders
Before writing this kind of partnership agreement, meet with your cofounders to discuss your priorities. Each founder can prepare answers to these questions before they meet in person:
- What individual and group goals do we have for making the business successful?
- How will we distribute ownership percentage among the owners?
- What is each person’s contributory role as company owner (job description, duties, time commitments, etc.?)
- Are ownership shares (percentages) conditional to vesting according to continuous partnership in the business?
- What happens if a founder doesn’t fulfill their obligations as the agreement describes?
- Will decisions require unanimous or majority agreement? What other voting procedures are important?
- Are the founders allowed to launch other businesses while readying the business for operation?
- If members wish for payback, what will the reimbursement method be? What are the market vesting designations for individual equity if an individual asks for payback?
- How will the company handle intellectual property once the business grows by selling proprietary products and/or services?
Use these questions and your responses as launching points to guide the discussion. Consider everyone’s input and be prepared to defend your point of view. Value the different perspectives people present so you can draft a comprehensive agreement that satisfies everyone’s preferences.
Step 2 – Draft the Agreement
Draft the agreement using the considerations from your discussion. You can start writing one from scratch, but it’s easier to use a template. This way, you can fill in key details relating to your specific business, and you don’t have to spend time writing large blocks of text that are the same across different founders’ agreements.
Step 3 – Get a Legal Expert to Review the Agreement
Ask a lawyer to review the document to ensure it contains legally binding provisions. They can offer legal advice, allowing you to revise the document for clarity.
Step 4 – Finalize and Sign the Agreement
Continue modifying the agreement until all parties are content with its provisions. Obtain the signatures of all the founders. Have them print their names and write the date they signed the document.
Founders’ Agreement Sample
Below, you can download our free founders’ agreement template in PDF or Word format to start planning your business’s details with your co-founders:
