Founders Agreement: Why is It Important?

A Founders Agreement is a legal document that outlines the roles, rights, liabilities, ownership structure, and responsibilities of cofounders. This Agreement prevents any future dispute, which may occur among co-founders. It also guides the business or firm in uncertain accidents such as life loss, resignation, and voluntary retirement of any co-founder. This agreement provides clear structures for dispute resolution and establishes new regulations to manage intellectual properties and sensitive information.

Here are some key facts of the founders’ agreement.

• Founders’ Agreement must be in written format.
• Two or more parties can join the Founders’ agreement. They are called co-partners.
• While incorporating the company all co-founders have to enter into the agreement.

Benefits of a Founders Agreement:

A Founders’ agreement is beneficial for businesses in the long run. Here we have mentioned some key benefits.

• Defines roles and responsibilities: The founders' agreement provides a clear view of the roles and responsibilities of each co-founder within the company. This promotes accountability, and proper framework and prevents power imbalance which ensures growth in operational efficiency.  
• Outlines Business Plan: Co-founder agreement describes the mission and vision of the company and its goals. Setting goals and tracking the timely progress enhance the business.
• Mitigate dispute: The founders’ Agreement states the responsibilities of each founder according to their expertise. This provides a structural way to control disputes over decision-making, overlapping of responsibilities, etc. It ensures that operations will be conducted smoothly.
• Protect Intellectual Property: Intellectual properties such as trademarks, logos, brand names, etc. are protected by the founders’ agreement. This agreement makes sure that any intellectual property developed by any founder is owned by the company to prevent the valuable inventions/ideas from staying under the company.
• Decision Making: The founders’ agreement defines the decision-making framework of the company. This clarifies the authority of the founders and how the decision will be made such as voting process or unanimous decisions.
• Compensation Provisions: This agreement defines the compensation that needs to be carried out if any co-founder violate rules.
• Confidentiality and non-compete clause: This agreement protects businesses from any unfair trade practices and competition. This clause prevents founders from joining any competitor company. The confidentiality clause ensures any sensitive information stays protected after a founder leaves.

Documents Required for Founders’ Agreement:

Here we have provided a list of the documents needed to form a Founders agreement.

• POI (Proof of Address) of all co-founders.
• POI (Proof of Identity) of all co-founders.
• POI (Proof of Identity) of witnesses.
• A clear objective of the company business model.
• Equity shares the details of each co-founder.
• Overall share percentage of each co-founder.

Process of Drafting a Founders’ Agreement:  

To draft a Founders’ Agreement one should follow every step carefully, and add all the required information including identity proof, objectives, terms and conditions, etc. The procedure of drafting a Founders’ agreement involves these following steps.

1. Identity of the Co-founders:

First and foremost, state the identity of the co-founders and their roles in the company. Provide basic details such as full name, address, designation; and mention the breakdown of the ownership structure, Future vision, and goals.

2. State Ownership and Equity Details:

Clarify the equity share between co-founders. Mention the area of responsibility of each co-founder. This section will serve as a recorded document, limiting one to overstepping another’s role.

3. Mention Roles and Responsibilities:

Define each co-founder's roles and responsibilities clearly.

• Title Expectation: Clarify the designation of each co-founder and their assigned duties.
• Narration of Roles: Narrate the decision-making authority such as hiring, firing, etc.

4. Commitment and Contribution:

Provide details about the commitments and contributions of the co-founders. Here are some important factors mentioned below.

• Time Invested: Mention the working hours of the founders willing to dedicate.
• Dispute Resolving: State the method to resolve any dispute such as mediation, arbitration, or legal courts.
• IP Ownership: Mention who owns the rights. Make sure any Intellectual properties created by the founders for business purpose belongs to the company.

5. Termination and Founders Withdrawal:

Specify what happens if a founder leaves, retires, or passes away. Add a termination clause that can provide exit terms if the company fails or makes an Initial Public Offering (IPO).

6. Signing the Agreement:

Once everyone is on the same page all the included members must sign the contract.

Key Clauses of a Founders Agreement:

• Founders’ details: In this section, define the names of the co-founders and their designations and responsibilities.
• Ownership Structure: Ownership structure is a crucial element that helps to build the foundation for equity distribution. This structure provides the details of ownership percentages and is also involved in the decision-making process, company governance, etc. A well-versed ownership framework plays an important role in maintaining clarity among co-founders.  
• Vesting:  Vesting is a legal term that requires employees to complete a specific time of employment to access any kind of benefits. Mention the vesting schedule of each co-founder's equity/benefit in the company in this section.  
• IP (Intellectual Property): Applying effective methods is necessary to maintain healthy working relations among co-founders and protect the company’s intellectual properties such as trademarks, logos, patents, etc. This clause prevents any misuse of the company’s documents and innovations. Define the IP ownership and management details to mitigate any misunderstanding. Additionally, this clause is also effective in safeguarding confidential information and trade secrets.  
• Confidentiality: Confidentiality is vital for businesses to protect sensitive information. State clear guidelines to protect data. Add this clause to the agreement to ensure comprehensive protection. Mention the time period of confidentiality clause effectiveness on each co-founder and if there are any exceptions. Add details of the consequences if anyone violates confidentiality obligations.    
• Termination and Exit: In this section define the range of exit scenarios that the co-founders might consider. There are various exit strategies such as Initial Public Offerings (IPO), Acquisition by any other company, strategic mergers, etc. Clear communication among co-founders regarding exit strategies is vital to make crucial decisions.
• Dispute Resolution: Conflicts are an inhabitable part of any business where the ownership is divided among more than one founder. Add a structural approach to a dispute-resolving process in the agreement. One of the primary paths to resolve disputes is mediation. This encourages open communication among founders in front of a mediator without the need for legal proceedings. If somehow mediation fails to resolve the dispute, there is another alternative called arbitration. Arbitration provides a binding resolution delivered by an impartial third party. These methods offer a complete framework for dispute resolution.

Founders Agreement Template:

THIS FOUNDERS AGREEMENT is made and entered into as of (date with month and year) by and among the founders of the [company]:

[Insert the Name]

[Insert the Name]

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows.

• Business Details:

The name of the business is [XXXX].

Purpose of the business.

The company's initial place of business is located at [Business Address].

• Capital Contribution:

Each founder agrees to contribute the following:

[Founder One]

[Founder Two]

Details of ownership in the company:

[Founder One]

[Founder Two]

• Vesting Schedule:

The founders should establish a vesting schedule. The equity granted to each founder will vest according to the schedule. If any founder leaves the company before the mentioned time period no equity will be vested.

• Roles and responsibilities: Mention each founder's responsibilities.

[Founder One: product development, project planning, etc.]

[Founder Two: C.M.O (Chief Marketing Officer)].

Decisions shall be made by vote.

• Decision-Making Management:

Founders should have voting rights proportional to their share.

The company should have a board of directors. [Name of the board of Directors]. Majority approval is required to make any key decisions, such as acquiring a business, selling a company, etc.

• IP Ownership: Any intellectual property, such as trademarks, patents, etc. created by any founder should belong to the company, not the individual. If any founder leaves the company he must transfer every IP to the company.
• Founder Exit and Termination: Only written agreements signed by the founders can modify, or terminate the agreement. A founder must serve a notice before the founders quit or are removed. They have to offer their shares to the other founders at the correct market valuation. If the founder is removed for violating any rules the share will be forfeited automatically. When a founder wishes to sell their shares they have to offer other founders first.
• Non-compete Agreement and Confidentiality: Founders have to agree not to start any competitive company for a [XX] number of days after they resign. They must not disclose any trade-related, financial information, etc.
• Dispute:  The Founders agreement undertakes to resolve any dispute through mediation. If meditation cannot resolve the dispute then the founders should agree on performing either arbitration or judiciary court process.
• Amendments and severability: Any changes to the agreement must be in writing and signed by all founders and if the court rules any provision unlawful or void, the remaining provisions of that agreement will remain in effect.  
• Signature: by signing the agreement the founders acknowledge they have read and agreed to follow all the terms and conditions of the agreement.

FOUNDER ONE

INSERT FULL NAME:

DATE:

SIGNATURE:

FOUNDER TWO

INSERT FULL NAME:

DATE:

SIGNATURE:

If there are more than two cofounders, you must enter their names at the beginning of the agreement and sign at the end, as displayed here.

Conclusion:

In conclusion, the founders’ agreement is a pivotal document for new startups and businesses. This provides a well-planned legal structure for the business and works as a common link between the founders. This Agreement secures the business interest and builds transparency, accountability, and commitment of the co-founders. Any new business or start up needs to acquire a trademark and corporate registration to incorporate their business. This is the first step to start your journey as an entrepreneur. For more information contact Online Legal India.