WHAT IS A FOUNDERS AGREEMENT?
A founders’ agreement can help you avoid a messy divorce from your business partner. A founders’ agreement is designed to protect each founder’s interests and to prevent conflict down the line.
In the initial stages of your business, when getting this off the ground — it’s vital to have a clear agreement with your co-founders about the key issues that will achieve the business’s objectives.
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.
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
IMPORTANT CLAUSES IN A FOUNDERS AGREEMENT
- Particulars of the Business & Founders
The names of the founding team should be clearly set out along with the particulars of the business itself.
- Duration of Agreement
You may want to set a timeline incase you decide to retire or do something else along the way. Don’t get tied down.
- Goals and Vision of the Business
Predicting and recording how you want your company to operate is an important step so go ahead and write down your plans for the short, medium and long term.
- Designation and Responsibilities of Cofounder
Make sure to establish some clear lines of primary responsibility and enable a functional management system that enables each of the co-founders to have clear responsibilities and reporting obligations. Doing so will go a long way in helping you minimize growing pains.
- Equity & Vesting Arrangement
You’ll need to allocate the ownership of your new enterprise amongst the founding team. You are not doing this just because investors expect it. You are doing it because you will create very significant enterprise risk if one of the members of the founding team picks up and leaves the business.
- IP Assignment and Protection
IP comes in many forms but make sure that whatever IP is being developed for your new enterprise belongs to the entity and not the individuals behind the development of the IP. Plan ahead. Otherwise, you will jeopardize the viability of your new enterprise.
- Remuneration
As a Cofounder it is important that your remuneration and bonuses are fixed from the beginning to make for better accountability.
- Exit Clause
When it is time to step away from your company, on what terms are you exiting? Set it out from the beginning.