A founders agreement is a contract signed between the co-founders of a firm to determine the purpose and percentage of equity ownership for each founder. The agreement states all the responsibilities, rights, roles and salaries of the co-founders. It includes a business plan, statement, corporate bylaws and can operate as an LLC or partnership agreement.
The founders’ agreement can be based on Pre Incorporation Contract, as it would clarify the nature of each ownership interests. Upon adoption of the contract, the parties will assume the rights and liabilities that are mentioned in the contract. If a promoter gets legally bounded to a contract on the behalf of a corporation, the promoter shall be personally liable to meet the obligations of the corporation if it is yet to be formed.
Importance of Founders’ Agreement
The agreement acts as a guideline on the relationship between founders, sharing work, vision, finance and legal. Since it determines the equity ownership of the company, it also determines the structure, existing intellectual property and voting rights of the founder. The agreement will be an insurance against unexpected situations such as transfer of shares, value additions and confidentiality. Other key terms:
- Termination and dispute resolution
- Time-based vesting
- Non compete
- Future financing
Components of Founders Agreement
Names of co-founders and the business
The agreement includes the names of the founders and company as per the registration.
Length of Validity
Documenting the length of validity by the Co-founders for the agreement is vital.
Goals of the Company
Although the agreement is not legally binding documenting goals of the company will build a strong business model. In addition to goals values, mission and work culture of the company can be included.
Roles and Responsibilities
Documenting the roles and responsibilities of the founders will help avoid confusion and redundancy. The agreement can include rules for equity and compensation based on performance.
The equity breakdown documents the capital, cash invested and other assets. The agreement also includes mode of business operation, names of investors and terms of the relationship.
Vesting in the company describes the amount of equity that can be awarded to the founder when exiting the company. Documenting the vesting schedule helps the company by protecting the assets, capital and clients.
As creativity fosters innovation, any creative material involved to build a business should be protected and documented. Any intellectual property developed through the business shall be incorporated by the company and not by the individual. Hence, documenting the full benefits of intellectual property in the agreement avoids piracy, theft and counterfeiting.
Compensation in an agreement describes salary, performance bonuses, stock options and other incentives. Detailing compensation helps to define revenues, gross profits, payment methods and periods and sales. The agreement can also state the power of approval to equity and debt.
Exit clause: Exit clause or termination clause describes how the business relationship between the company and the employer is terminated. The clause can include allowances, rights to intellectual property, stocks, debt and other penalties.