Overview of Founders Agreement
Founders Agreement is a document that creates contractual obligations between the owners/ founders of a company. The document specifies various details such as the functioning, management, ownership, and obligations of the founders towards the company. The document serves the purpose to safeguard the company's interest and prevent any conflict which may arise in the future.
The document entails different clauses. These clauses enumerate the rights, liabilities, ownership, and responsibilities of co-founders. It is created to protect the interests of each co-founder and to settle conflicts regarding the ownership of the company. It is often
Benefits of a Founders' Agreement
The following are some of the benefits of the Agreement:
- It helps the founders to manage the business efficiently.
- The Agreement ensures the security of ownership amongst the founders and minimises the risk of litigation over its dispute.
- It demarcates the role that each founder needs to perform in the company.
- It reduces the risk of conflicts between the co-founders.
- It enhances the growth of business as the aims and goals are predefined.
Essential Clauses of a Founders’ Agreement
There are various clauses that must be enshrined in a Founder’s Agreement such as:
- Defining the Business and its goals
It is essential that the business venture is well defined in your founders' Agreement. The business must have a unique and definitive name. The Agreement must also lay down the goals that the founders have decided to achieve and the services that they have finalised to provide. This clause must be specific and cannot be vague.
- Ownership (Equity)
Founders Agreement must also specify the breakdown of ownership of the company. Various factors dictate this clause like; division of equity based on the terms of capital invested by each owner, division based on the time each partner is willing to contribute or equal division amongst all the co-founders.
- Intellectual Property
This clause will safeguard the company's right over any intellectual property over the individual right of the co-founder. If any intellectual property has been created by co-founders during the term of employment in the country, then the exclusive usage of that shall reside with the company and the individual shall not be able to use it in any manner post his resignation.
- Roles and Responsibilities
The document shall entail the roles and responsibilities of all the co-founders. Each member has a unique trait that they bring to the table. To run a successful company the tasks have to be clearly defined and demarcated, this will result in reduced costs and an efficient management system.
- Decision-making Rights
This clause helps with two key factors in the decision-making process. Firstly, the clause shall define the circumstances/ conflicts in which a decision needs to be made. Secondly, it shall assign the final authority who shall have the right to take the final call in such matters.
- Remuneration Clause
The Agreement should have a clause that specifies the payment schedule. The founders must decide on the amount of remuneration and the period till which this remuneration should be awarded.
- Vesting Clause
Over time not all the founders would want to continue with the business and may seek a way out. In order to make the co-founder stay longer with the company a proper vesting structure needs to be devised by the company. This clause shall lay down how a co-founder can receive their vested shares. There are two ways through which vested shares can be incorporated into the founders' Agreement these are:
- Time-based vesting: In this type of vesting, the shares allotted to the co-founder would be based on time spent by him before his resignation from the company. The time can vary from 6 months to 1 or 2 years. The remainder of the shares shall be returned to the company.
- Milestone-based vesting:In this type of investment, the shares will be allotted to the co-founders whenever the company achieves a particular milestone. This is a condition-based vesting n case the founder decides to resign before achieving such a milestone then shares shall not be given to him/her.
- Dispute resolution
In every business or startup, there is a high probability of conflicts among the founders. Therefore, it is advisable to have a dispute resolution clause in the founder's Agreement. Usually, an arbitration clause is added here to resolve the dispute in a simple and cost-effective manner so that the business can continue to function smoothly.
- Non-Compete Clause
A founder's Agreement must contain a non-compete clause. The non-compete clause will prohibit a co-founder from starting a business with a similar idea for a limited period of time in case of resignation, termination, or expulsion from the company.
The founders have a lot of confidential information about the business with them. This clause would prevent a co-founder from disclosing vital or critical information about the company to outsiders.
- Exit Mechanism
This clause defines the process of how a co-founder may leave the organisation. Along with this, the clause shall also mention the steps the organisation needs to take in the case of the removal of the co-founder.
- Law and Jurisdiction
This clause specifies the law under which any disputes relating to the parties shall be dealt with and the jurisdiction under which any dispute arising out of the Agreement shall be handled.
Documents required to prepare founders' Agreement
The following documents need to be referred to for drafting a founder's Agreement
How will Corpbiz help you with your Founder’s Agreement?
- When you opt for our Founder's Agreement Drafting services, our experts will reach out to you and set up a meeting to understand your goals and needs.
- Post consultation you will be required to submit the necessary documents, After this, our team shall begin with the procedure for drafting your Founders’ Agreement
- Once the draft is completed our experts shall have a final review after which the document shall be delivered to you.