Whether you are launching a small company with several friends or wanting to go public, the first thing you should do is to ensure all legal matters have been covered by a founder’s agreement. Although a founders’ agreement doesn’t require an official filing with your county or state government, it is still an important document vital to preventing conflicts regarding the distribution of new business ownership and the specific affiliation between you and the co-founders of the business.
What is a Founders’ Agreement?
A legally binding contract that founders develop and agree to abide by, a founders’ agreement is essentially the creation of a business just before it is officially launched. By clearly defining the liabilities, responsibilities, and roles of individual partners representing the business, this agreement demonstrates that the founders are serious about launching a new business.
Drafting a founders’ agreement and having it signed by all business owners is the best way to ensure everyone agrees to and will abide by critical financial, legal, and contractual issues comprising the core of the business.
Reasons for having a founders’ agreement include these critical points:
- Establishes rules for terminating the contract if one or more business partners wish to withdraw from the business
- Provides guidelines for resolving internal or external disputes
- Explains step-by-step how a dissolution would be managed and completed, if applicable
- Defines the protocols for protecting shareholders
- Cements the seriousness of intent to form and operate the business
- Attracts investors by signaling the founder and his/her partners are methodical, organized, and honest about the internal structure of the business
- Contains information regarding the assignment of all intellectual property (IP) associated with the business. This prevents anyone from absconding with mission-critical IP if they decide to suddenly leave the business.
- Established rules for an exit strategy if another entity presents an offer to buy the business. A founders’ agreement should address things like succession, rights of first refusal, and accelerated vesting.
When to Use a Founders’ Agreement?
Although using a template is optional, entrepreneurial experts do not recommend starting up a business without one fully vetted and signed by the owner and co-owners of the business. As soon as two or more individuals decide to create a business together, the first thing they should always do is protect the viability of the business by developing a founders’ agreement.
Nobody enters into a business partnership expecting the worst to happen down the road. The first several months of a new business are probably the most exciting time for everyone involved. The farthest thing from anybody’s mind is the possibility of the business collapsing due to bad faith actions on the part of the owners.
A founders’ agreement is specifically intended to preemptively address and resolve any issues that the owner and co-owners want to document and agree on for the purpose of fairness and averting the risk of misunderstandings or acrimony in the future.
How to Write a Founders’ Agreement
Look at any sample founders’ agreement and you’ll likely feel a little intimidated by the complexity of details and concepts included in the document. Also, be aware that writing an agreement from scratch isn’t a task you can complete in a few hours. Depending on the type of business you and your co-owners plan to launch, it could take a week or more to devise an agreement that everyone involved would consider comprehensive and complete.
Questions that can help formulate a prototype of a founders’ agreement sample include:
- What individual and group goals do we have for making the business a success?
- How will the ownership percentage be distributed among the owners?
- What is each person’s contributory role as company owner (job description, duties, time commitments, etc?)
- What are the exact amounts of capital each person is contributing to the business? Where is this capital going and for what purpose?
- Are ownership shares (percentages) conditional to vesting according to continuous partnership in the business?
- What happens if a founder is not fulfilling their obligations as described in the agreement?
- Will decisions be determined by unanimous vote, majority vote, or other means of voting?
- What will be the procedure if anyone wants to exit the business? Will the other founders be allowed to buy the existing founder’s shares of the company? How much will those shares cost?
- Are the founders allowed to launch other businesses while readying the business for operation?
- If members wish for payback, what will be the reimbursement method? What are the market vesting designations for individual equity if payback is asked for?
- How will intellectual property (IP) be handled once the business starts growing by selling proprietary products and/or services? Defining precisely how IP is under the sole ownership of the business is vital to protecting IP from unauthorized external use.
Founders’ Agreement Sample
Below you can download a free founders’ agreement template in PDF and Word format:
Founders’ Agreement FAQs
Is a Founders’ agreement legally binding?
A founders’ agreement is legally binding. Any type of agreement or document that includes resolutions regarding the ability of involved entities to seek legal recourse for damages if another individual does not fulfill their agreed-upon commitments and obligations is a legally binding contract.
A founders’ agreement is legally binding because it incorporates two legal concepts: value and agreement. As long as all parties agree to the agreement’s terms and something (a product or service, for example) valuable is exchanged for cash according to the terms of the agreement, it is considered a legally binding document.
What should a Founders’ agreement include?
A typical founders’ agreement should contain information about the following:
- Interpretation of terms relevant to start-ups (project, exit date, shareholder, party, etc.)
- Incorporation and transfer of ownership
- Titles and responsibilities (tasks and roles)
- Time commitment of each founder (full-time, part-time, hours per day)
- Who is designated as the primary and secondary decision maker
- Initial capital contribution
- Ownership and business structure
- Vesting schedule
- Dispute resolution procedures
Founders’ Agreement vs Shareholder Agreement: What’s the Difference?
The difference between a founders’ agreement and a shareholders agreement is that a founders’ agreement can be used with any business entity such as LLCs, corporations, LLCs, etc, while a shareholder agreement is intended for corporations only. In addition, a founders’ agreement is drawn up and signed before a business launches its operation. A shareholders’ agreement is a legally binding contract that is created and signed sometime after a business has been in operation for a while.