Starting your own business? Here are the reasons why you need to think about Founders’ Agreements
In the early stages of a start-up, co-founding entrepreneurs are excited about bringing their ideas forward. Entering into a Founders’ Agreement is understandably not number one on their to-do list — if they think of it at all.
Here are the reasons why you should have a Founders’ Agreements— even before your company is incorporated:
What is a Founders’ Agreement?
Founders are co-working entrepreneurs who started a business and incorporated this business into a company. A shareholder owns a share in a company. Founders are usually the first shareholders of a start-up company.
A Founders’ Agreement is effectively a shareholder agreement between founders. A shareholder agreement details the relationship between different owners of shares.
Hence, a Founders Agreement is an agreement that regulates the business relationship of the founders.
Why is it important to have a Founders’ Agreement?
Aspirations: Negotiating a Founders’ Agreement involves having a conversation about each founder’s aspirations. This includes their thoughts on how the business should be run, what they are afraid of, how they will work together etc. These discussions are important to minimise unwanted surprises during the company’s lifetime.
Strategies: The Founder’s Agreement will contain, amongst other things, the agreed strategies, contribution of each founder, and management of the business. It implements an effective governance in the company and sets out the rights and responsibilities of each founder.
Business relationships: It will regulate unpleasant situations such as a deadlock, the exit or entry of a founder, the removal of a founder, the winding up of the company, including its aftermath and so on. Having set rules for resolving disputes helps to hold a business relationship upright and if the relationship would “break down” there are set rules to avoid unnecessary lengthy disputes.
Governance: As a result, a Founders’ Agreement does not only support each other’s understanding of the governance structure of their start-up, it also introduces an effective governance structure and provides set rules for dispute resolution.
Credibility: Finally, having a Founders’ Agreement indicates the seriousness of the business which is very welcomed amongst investors.
What should your Founders’ Agreement include?
First, it is important to understand that one-size does not fit all. Founders should sit together and negotiate the agreement to reach a good fit for all. The agreement should reflect the intentions and negotiated terms of the parties. This process can include seeking independent legal advice.
There are some key points founders must think about to have a good foundation for a great business relationship. These key clauses of a Founders’ Agreement include:
Ownership structure: How many shares each co-founder owns or will own in the company. It is not only a monetary contribution that will be considered, but also the experience, know-how and intellectual property a founder brings into the company.
Vesting provisions: To ensure that a founder cannot simply leave the company with substantial shareholdings, a vesting clause can be implemented. This is important because in the event a founder leaves, enough equity for future investors is retained in the company.
Roles and responsibilities to the company: To take the start-up forward, founders need to collaborate efficiently. This provision clearly lays out who is responsible for what, including day-to-day tasks.
Founders’ rights: Who has voting rights in the company’s decision-making process.
Intellectual property assignment: It is important to determine the ownership of all intellectual property created and/or used by the start-up. Founders may be asked to transfer all their rights, titles, and interests in the intellectual property to the company.
Founder restriction: It is important to set out whether founders are allowed to work for a competing business and how confidential information should be preserved.
Removal or departure of a founder: What happens when a founder is removed or leaves the company should be considered in advance to provide certainty to all parties.
Dissolution and termination: It is important to set out circumstances or events that lead to the dissolution or winding up of the company.
Dispute Resolution: Founders should agree clear procedures which will apply if a dispute or deadlock arises.
You can get further guidance on the key provisions to include in your Founders’ Agreement in this qLegal toolkit.
As we have shown, it is important to discuss a Founders’ Agreement in an early stage of your start-up. The negotiation process will reveal expectations and help to introduce an effective governance structure, which will bring certainty to all founders and potential future investors. As a result, an openly negotiated and concluded Founders’ Agreement will provide your start-up with a solid basis to thrive!
This article was written by Celine Gerber who is participating in qLegal as part of her Law Masters studies at Queen Mary, University of London.
qLegal provides pro bono legal advice to start-ups and entrepreneurs on intellectual property, data protection, corporate and commercial law. See the qLegal website for more details and to book your appointment now. Follow us on Twitter and LinkedIn for regular updates on issues relevant to your business.