A Founders’ Agreement is a legal document drawn at the time of the incorporation between the co-founders of a company stating the ownership, roles, duties, responsibilities, the initial investment, payments/ remunerations etc for each founder. It also sets forth the goals and projections of the co-founders.
Founders’ Agreement 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.
What are the key issues upon which the co-founders must be in concurrence?
A) Share in equity
The co-founders must be in agreement upon the equity held by each co-founder (may either be by percentage or the number of shares). It is the contribution provided and the role played by each co-founder that determines their share in equity.
B) Capital Raised
The initial investment of each founder, as well as any additional contributions in form of finance that may be required in the future for operational and expansion purposes, which the founders provided.
C) Division of Roles and Responsibilities
The roles of the founders should clearly be defined to avoid an unmanaged front of the business. The responsibilities may be divided as Sales, Marketing, Administration, Financing, Operations etc as per who brings what on the table.
D) Compensation
The agreement should also specify the designation of the co-founders along with the remunerations, compensation, benefits and reimbursements to be provided to them.
E) The exit of a Co-Founder and Restriction on Transfer of Shares
This is another aspect that must be discussed and clearly provided in the Founders Agreement to protect the interests of the co-founders. There can be a lock-in period prescribed and a provision to deal with the rights of the exiting and other co-founders for an occasion where a co-founder desires to exit before the completion of the lock-in period. The fate of the shares held should also be mentioned clearly.
F) Other clauses that may be provided in the agreement are:
- Intellectual property rights and assignment;
- loans from founders;
- c. Non-Compete;
- Dispute resolution and governing laws;
- Severability etc.
Thus we understand that Founders’ Agreement establishes clear terms of the relationship between the Co-Founders and their obligations towards the business. More importantly, being a governance document, it acts as a guiding document for the potential investors.
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