A founders agreement is an official contract or a legal agreement executed between the co-founders of the company while setting up a business. This agreement elucidates the roles, rights and duties, responsibilities, ownership, liabilities, and investment proportion of each founder.
- A founders agreement should be made in the written format, not oral
- Two or more partners jointly can enter into the founders agreement called co-partners/ parties
- All co-founders will enter into the agreement exactly while incorporating the business or company.
The objective of the founders agreement is to avoid disputes regarding business, which may arise over time between co-founders. This agreement apparently set out the strategy of the founders, who should act within the ambit and should follow the mandatory provisions laid on.
Founders agreements also help in tackling uncertain occurrences like the death of the co-founder, resignation, which directly affects the sustained growth and smooth running of the business or firm.
Benefits of a Founders Agreement
Determining the Type of Business Entity:
The founders agreement will clearly mention the nature and type of entity that should be established by the co-founders, thereby setting the proper path to be followed.
Outlined Business Plans:
This agreement describes the vision and mission of the entity and sets the short term and long term goals to be achieved over a period of time.
Designating the Roles and Responsibilities:
Obviously, there will be overlapping roles and functions between co-founders without having a proper framework of the assigned roles. Therefore, it is important to designate the roles and responsibilities of the co-founders, in accordance with their area of mastery like marketing, operations, finance, etc.
Structure of Ownership:
The founders agreement will clearly specify the structure of ownership pertaining to the initial contribution made by the cofounder or the percentage of the equity shares held by the cofounder in case of a company, thereby avoiding any future conflicts in between them.
At a certain point in time, there will be an ideological conflict between co-founders, So these conflicts are to be handled through the proper decision-making process. Here the founders agreement will formulate a procedure to be followed during the decision making process. If the voting system is adopted, then it should define the value of votes for each founder and provide a solution in case of a deadlock situation.
This agreement laid down the scheme of compensation to be carried out, if anyone of the cofounder has violated the provisions mandated. Here, the proportion of the compensation to be made will be mentioned for every cofounder.
Expulsion of Co-founders:
Any co-founder can be evicted from the company for indulging in fraudulent activities like misappropriation of funds, sexual harassment, and getting employed with other organisations. This agreement ensures a proper structure on how to deal with these situations and sorting out appropriate funds to be reverted to the expelled co-founder.
There was a separate clause on confidentiality in the founders agreement, which makes an obligation for founders to not reveal the secrets of the business.
Documents Required for Preparation of a Founders Agreement
- Address proof of all co-founders
- Identity proof of all co-founders
- Identity proof of witnesses
- A clear objective of the company
- The number of equity shares of each co-founder
- The overall percentage of shares of each co-founder.
Procedure of Drafting a Founders Agreement
The procedure for drafting the founders agreement involves the following steps:
- Step 1: The draft of the founders agreement is prepared by including all the required fields, like objectives of the company, terms, and conditions to be followed by the co-founders
- Step 2: Once the drafting process is complete, check if all mandatory provisions have been included, with no ambiguous clauses
- Step 3: Add additional information that has to be furnished in the agreement, if required
- Step 4: The final draft should be acknowledged by all the cofounders, that it has been scrutinized with acceptance of the aforementioned agreement
- Step 5: Once all co-founders have agreed to the agreement, it should be notarized on a non-judicial stamp paper
- Step 6: After notarizing, get the signature of all the co-founders on the agreement
- Step 7: Before entering into the agreement, get expert guidance to avoid disputes.