Founders Agreement
Why do you need a Founder’s Agreement
The most important reason a Founders Agreement is advised is that it avoids any ambiguity that might arise in the future with respect to the management of the company and business relations between the founders. It is able to identify the prospective risks and complications along with supplying provisions for dealing with the same.
Thus it is always recommended that a written Founders Agreement must be drafted after consulting an expert as per the requirements of the business and understanding of the co-founder.
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What Is a Founders’ Agreement?
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 could be a standalone document, or it could be incorporated into corporate bylaws, an LLC operating agreement, or partnership agreement. It is designed to protect each founder’s interests and to prevent conflict down the line.
If you’re an entrepreneur with that golden, once-in-a-lifetime idea, it can feel impossible to hit the brakes. The name of the game is momentum—slow down, and you’ll miss that window of opportunity, right?
But sometimes you have to press pause, take a deep breath, and make sure you’re not missing anything big before moving forward. It’s especially important to complete any legal items on your to-do list, so you can protect your business now and in the future.
If you’re planning to run your business with co-founders, then a founders’ agreement is essential. A business lawyer or online legal service can help you create one, or you can make a simple one on your own. This document outlines each owner’s rights and responsibilities, a very important step for avoiding conflicts among co-founders. We’ll show you what goes into one and exactly how to create one.
Reason
Importance of Having a Founders’ Agreement
A founders’ agreement is a baseline for how your co-founder relationships will work in the future, how your company is structured, and what each owner brings to the business. It’s important no matter what type of business entity structure you have.
In most cases, this document is optional—but we don’t recommend running a business without one. It is your insurance against the unexpected and the I-hope-this-never-happens. Don’t hurt yourself down the line by skipping an important step upfront! Drawing up a founders’ agreement is best done as soon as that sparkle in your eye becomes an actual business plan: when things progress from “I have this idea” to “Let’s actually do this,” you’ll want one to be drawn up. And if you’ve passed that stage already—better late than never. You can’t predict the future, but you can control the present.
Here are some of the reasons why having a founders’ agreement is essential:
Clarifies each owner’s role in the business
Provides a structure for resolving disputes among founders
Provides clarity if and when a partner wants to enter or exit the business
Protects minority owners
Signals to investors that you have a serious business
How to
How to make a founders agreement
Here are some steps you can take to make a founders agreement. They’re not binding, but they are a good general guide to follow as you work through this process.
1. Choose a template there are templates all over the internet, including at the bottom of this article. Choose one that best fits your startup or create your own with pieces from different templates. The goal is to create a founders agreement that best fits your, your cofounders’, and your startup’s needs. And while the legal talk might be intimidating, don’t worry about it yet. We’ll address that in Step 4.
2. Fill out the simple sections Go through and fill out all the sections that don’t take a lot of thought. Stuff like your names, where you’re located, when the company started, the name of the company, if you have that worked out. Basically it’s the stuff that you don’t have to consult with each other on.
3. Take the time to hash out the hard stuff. And then it’s time for the hard conversations! This is when you and your co-founders need to go through all of the tricky stuff, from equity to compensation to termination, and figure out what you want to do.
Remember: You trust each other. You’re working together. It’s business, not personal. But you all need to protect your own interests and the interests of the company. It’s okay if these conversations take a few days or even a couple weeks, but consider setting a date when it will be fully finished, just to make sure you don’t keep going back and forth forever.
4. Get any legal advice you might need. As we mentioned above, it’s a good idea to get a tax expert to help you outline the tax section. But it’s also a good idea to have your founders agreement reviewed by a lawyer, because it is a legally binding agreement. Having a professional, legal, and non-invested eye on the document can help ensure that you’re all protected in the future. They’re also likely to catch legal technicalities that you, as non-lawyers, might not have noticed.
5. Get a second opinion. But legal opinions aren’t the only opinions! It can also be a good idea to ask a fellow entrepreneur or even an advisor to look over your founder’s agreement. (You can black out any personal or financial info, if that makes you feel more comfortable.)
Fellow entrepreneurs may be able to give advice based on their own experience and also notice things that a lawyer might not. It’s never a bad idea to utilize your community for something like this, assuming the community you’ve built is a solid and knowledgeable one. So use your networks!
6. Review and sign! Finally, give each of your co-founders time to review their copy of the founder’s agreement, consult their lawyers if necessary, and then sign and date it. Once it’s been signed and dated by everyone, it’s a legally binding document. Be sure to store an electronic copy with everyone’s signatures that your whole team can access, for future reference.
Advantages
Advantages of Founders Agreement?
Clarity
It gives clarity between the founders. There are certain matters which are not discussed between the co- founders. Thus, this agreement provides clarity of doubts, decisions and terms.
Segregatio
The roles and duties are clearly segregated and defined through founder’s agreement.