With all the things that go into setting up a new business, it can be tempting not to draft your founders agreement. If you are friends and work colleagues, you would expect everything to work out, but this is not always the case.
What is a founders agreement?
A founders agreement is a legal contract that a start-up business with two or more founders enters into. It can cover everything; including who is involved, how much they’ve put into the business and what happens if someone leaves. It’s a legally binding contract and should be created at the set-up of the company.
Do you need one?
Like all contracts, a founders agreement is there to assist you to navigate day-to-day operations and help when things don’t go as planned.
What should be included?
There is no set form of a founders agreement, but there are some important things not to omit.
The names of everyone involved in the start-up need to be included. The name of the business should also be recorded here.
Here, you determine what percent of the company each member owns. If your company is a Limited Liability Company, you should also decide what percentage of management interest each member owns.
Every founder, of your start-up, would have provided a contribution in order to become a founder. That could be cash, property, services rendered, a promissory note, or a combination of all.
If one of your co-founders contributes something other than cash, you need to work out the monetary value and record it here. At this stage, you need to work out whether members will continue to contribute capital throughout the life of the company or just at that initial investment.
In this section, you are detailing how the budget and expenses will be handled. You need to decide if one person is in charge of the budget or whether it will be approved by a designated individual? Any costs that founders incur need to be addressed here too. How should founders submit for reimbursement?
You might think you have handled this with a verbal agreement but don’t take the risk. By writing out each founder’s role and responsibilities, you’ll not only be making sure that the buck stops where it’s supposed to, but also that you and your co-founders aren’t re-doing each other’s work.
Who is and who isn’t going to be allowed to vote on company decisions? What parts will they be able to vote on? You could decide to give voting rights based on a member’s percentage of interest or give limited voting rights to certain groups.
How do you know how to fairly compensate yourselves? Some founders choose not to take any salary at all at the beginning, while others need an income from the business. Whatever decision you make, it needs recording here.
Intellectual Property (IP) is everything that goes into making your start-up. Your start-up’s IP is anything created within working hours, ranging from blog posts, designs and ideas to a work phone or laptop. It’s up to you to decide how you want to approach it.
You should also record decisions regarding the sale of intellectual property. Who makes the decisions and who gets the money? All these factors need detailing.
The last thing to consider in this section is a confidentiality clause. It will ensure that you and your co-founders can’t become a competitor or consult for any competitors.
There may come a time that a founder member leaves. It could be because of a death, bankruptcy or dismissal. This section gives remaining members the choice of buying out the interests of the member. If you do include buyout rights, ensure you outline how it would happen, the buyout price, and the pay-out terms.
If you cannot set a buyout price, consider writing a provision that the price will be based on a fair market value at the time of the buyout.
It’s important that everyone involved in the start-up faces the sad fact that this may happen in the future. Outline what circumstances or events would lead to the dissolution of your business. You should also spell out winding-up procedures if your company dissolves.
As 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, as it is a legally binding agreement. Having a professional, legal, and third-party eye on the document can help ensure that you’re all protected in the future.
Our company and commercial team would be happy to discuss your founders agreement, or anything else, relating to your business start-up. Just get in touch to discuss.