Starting a business has always been exciting, inspiring and phenomenal. However, the majority of the businesses shut down within a few years due to certain reasons, with a prominent one being the non-consensus and friction between the founders. It is always essential for founders to come together and agree on their roles, compensation, structure. A Founders’ Agreement is an official contract that is signed between all the co-founders of a firm. This document states all the responsibilities, ownership, and initial investments made by each of the founders of the company. It is advised to make a founders’ agreement at the incorporation stage of an enterprise as it will lay out the responsibilities and roles of each of the co-founders. These relationships, once documented in the form of agreements, help in identifying, mitigating any potential risk, and bringing transparency with these resources.
Authorisation letter is signed to get attorney on board
Details are discussed with attorney
Founder’s terms of agreement are defined in a signed contract, consisting of
Roles and Titles for every founder
Scope of work and responsibility
Shares and equity
Capital Structure and Decision making
Timeline including investments, vesting schedule and deliverables
Non compete, Disclosures and Confidential informations
First draft is completed and shared with the founders
Changes are made, if any, pointed by the founders
Final agreement is signed and stored with founders as well as attorney
Outline of the agreement
Titles and roles
Logistics, Capital and Management
Terms of engagement
Details of capital raised (by founders and investors)
Ownership details (in the company)
Roles and responsibilities of each of the co-founders
Compensation (salary drawn by each of the co-founders)
Details of exit formality for founders
Dissolution of the firm
Details of dispute resolution
Miscellaneous provisions (assignment of intellectual property rights, non-compete clauses, etc.,)
Founder’s agreement is made at the time of the incorporation to avoid ambiguity that may arise in the enterprise in future. It also sets up the expectations and goals of all the co-founders by assigning each of them a specific role and responsibility towards the betterment of the enterprise.
Founders’ agreement is always better to be in a written format than being an oral contract. It is also important that it is to be drafted with the help of a legal team, which ensures elimination of all the loopholes that can be exploited.
While the process of how much is complex and needs you to have a conversation among yourselves, the answer is simple- Yes. Founders must pay for their own stock shares to remain compliant under company laws and corporate statutes.
A founders' agreement is a legally binding contract, usually in writing, that outlines the roles, rights, and responsibilities of each owner in a business.
It helps to prevent and settle disputes resulting from differences amongst founders. It clearly lays down the roles and responsibilities of the respective founders and establishes a robust system of management and dispute avoidance and settlement.