What is a Founders Agreement?

A founders agreement is usually referred to as shareholders agreement, is a written document that deals in cases such as relative split of the equity among the founders of the firm, also the fact that how long the founders will have to remain with the firm for their shares to fully vest. Thus it extends the role and responsibilities of the founding members of a company, the equity vested in them etc. Founders agreement covers various aspects that the founders undertake.

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.

What to consider before the drafting of Founders Agreement?

Before entering into a Founders Agreement, the co-founders must undertake a sincere dialogue to create an understanding about issues like ownership, management, remunerations, compensation, investments, the board of directors, etc. It is essential for the founders to have clarity which shall then be reflected in the Founders Agreement. The components of the Founders Agreement should be discussed thoroughly to be able to arrive at a detailed and conclusive result.

A well-drafted Founders Agreement helps to avoid situations which may possibly hinder the development and cause uncertainty in the management of the business. Also, a wise investor ensures that during the due diligence, the Founders Agreement is scrutinized.

It is always preferred to approach an expert consultant to assist in the drafting of a Founders Agreement. This ensures that the interest of founders and the business are secured in the best possible manner.

What are the Essentials of a Founders Agreement?

A Founders Agreement is a legal document drawn at the time of the incorporation of the business to avoid ambiguity regarding roles, responsibilities and payments/ remunerations of each of the co-founders. It sets up the goals and projections of the co-founders.

It must be free from all the loopholes that might be exploited at a later stage. Also one must ensure that it must be detailed, thorough and water-tight.

Some of the clauses that are essentials to a Founders Agreement are as followings

Definition and scope of the business

Ownership

Details of capital raised (by founders and investors)

Roles and responsibilities of each co-founder

Compensation of the co-founders

Exit formality for founders

Dissolution of the business

Dispute resolution and governing laws

Miscellaneous provisions relating to

intellectual property rights, non-compete clauses, loans from founders, sever ability etc.

Apart from these, the clauses may be added according to the requirements of the business and understanding of the co-founder.

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.

Segregation: The roles and duties are clearly segregated and defined through founders agreement.

Procedure of Founders Agreement?