Founder Agreement should be drafted carefully to include vesting period, roles and responsibilities of founders, exit terms etc. The cost to get the founders agreement drafted usually starts from INR 15000.
The most important step when starting a business is to define roles and responsibilities of all the co founders right at the start.
In other words, you should focus on building a solid foundation before taking the next step with your business. And if you’re planning to run your business with co-founders, then a Founder Agreement is pretty much the perfect place to start.
What is a Founder Agreement?
Founders agreement is a clear agreement between founders about number of issues that business might face. It has basic information like
- Roles and responsibilities of founders
- What happens to the shares of founder if he wants to leave
- What happens if new investor joins in?
- What happens if founder is not able to devote time?
- What happens in case the business shuts down?
It’s not mandatory to have founder agreement—but it’s a very important document to avoid future disputes. Even when raising funds, the investor will definitely ask for this document. A founders agreement is a guiding document in case the business does not go as planned.
Lets understand the content/clauses of founder agreement
Roles & Responsibilities
Equity Breakdown in Founder Agreement
The co-founders of a business will naturally want to share the business itself—that’s the basic idea behind equity. But how do you divide your company’s equity among its co-founders? Deciding in your founders’ agreement will help you dodge misunderstandings, hurt feelings, and potentially worse.
For example, some co-founders might just want to split the equity evenly between themselves. Others might want to distribute them according to the roles and responsibilities (which we discussed earlier) or according to who fronted the most cash to get the business on its feet.
Maybe you will give a bigger percentage to the person who came up with the idea in the first place, or to the one who coded the first demo or made the first batch.
Up to you. There’s no right or wrong answer—only a solution that you’ll agree with, and plenty that you won’t. But it’s way better to have this conversation in the beginning, when a heated argument can cause an impasse and possibly endanger the business getting born at all… Because the alternative is crashing and burning later on, when everyone has more skin in the game
You’re probably starting to see just how useful a specific founders’ agreement can be by now, huh? By laying out all of these financial details as early as possible, you’ll prevent any serious emergencies that a disagreement down the line might cause.
We can’t talk about equity without talking about vesting: if co-founders got their shares all at once, there would be nothing stopping half of them from hitting the snooze button and letting you do the work. By creating a vesting schedule—often four years with monthly installments—you’re encouraging everyone to earn their keep. Plus, investors will expect a market-typical vesting schedule, and not having one wouldn’t be a great sign.
Treat this section of your founders’ agreement seriously: it can have substantial consequences for your business.
Intellectual Property is the creative material that goes into setting your business apart from every other business. That includes your products, recipes, marketing materials, logo, branding, packaging, website, business plan, theme songs, inventions, and more. Needless to say, your intellectual property is important to protect—and the founders’ agreement is a great place to do just that.
First of all, you should make sure that any intellectual property developed for your business goes to the entity itself, not to any particular person. For example, say one of your co-founders comes up with a great new recipe or procedure. If your founders’ agreement states that any intellectual property devised for the business, during work hours, is owned by the business and not any co-founder or employee who came up with it.
Ideally this would never become a problem, but suppose someone decided to break away and form a successful competing business—all because of an invention he came up with while working with you. Protect yourself—and your intellectual property!
Second of all, you will need to decide what constitutes intellectual property for your company. Anything the co-founders create, relating to the company, during work hours—that’s an easy one. But what about a co-founder on vacation brainstorming new ideas? Or an employee having her own lightbulb moment? If something was written in the “notes” section of a company phone, is it the business’s intellectual property? You might feel inclined to be hard-nosed about this, but that’s not necessarily the best approach.
Third of all, you should outline the terms for selling off your intellectual property—which may or may not include the terms for selling off the entire company—in your founders’ agreement, too. Who has the authority to make that kind of decision? Where does that revenue go? These are just a few questions you will want to answer ahead of time.
Finally, considering discussing non-compete clauses and confidentiality agreements, too. Should a co-founder be able to own stock in competing companies? Or consult for your greatest adversaries? Or spill your deepest secrets? Of course not—and, hopefully, this is never a problem for your business. But the whole point of a founders’ agreement is to be prepared, so even if you trust your co-founders more than your own grandmother, don’t give them an easy out in case things change without you realizing!
Again, the salary and compensation part of the founders’ agreement is pretty basic—but incredibly important. Noticing the trend? We tend to overlook discussing these fundamentals when the entrepreneurial gears are spinning, but writing up a founders’ agreement forces us to address these topics… And clear up any mismatched expectations everyone could be bringing to the table.
It’s up to you how in-depth you want to go. You can create a thorough compensation plan that accounts for future growth, or you could just deal with present circumstances. Either way, setting a baseline will help you avoid unpleasant surprises.
Plus, this isn’t a bad place to consider figuring out how co-founders can use company money (or not!), whether they can own stock in the competition (and how much, if so?), and who approves investments or debt (and what the processes are).
Termination Clauses in Founder Agreement
Finally, a founders’ agreement should go over the circumstances of termination: what happens when a co-founder has been consistently underperforming, and needs to be let go?
Remember that while all of these conversations might feel awkward to bring up, they protect every co-founder equally. No one is exempt. The issues dealt with by a founders’ agreement are unfortunately not uncommon, and every good partner will understand the need for this kind of preparation.
That said, termination clauses can definitely be the most stressful topic to make a decision on. What would you want to happen if your co-founder flunked out on you? What would you want to happen if you were underperforming and dragging the business down? Or, alternatively, what happens if someone just wants to leave—for whatever reason they might have?
You’ll want to figure out what happens with unvested shares, especially. Often a company will have the opportunity to purchase those shares back from the founder at their original price, but that procedure is in your hands, too. Just setting up a system to deal with termination will go a long way—especially if that termination isn’t a friendly one and attorneys are brought into the picture. If that’s the case, your founders’ agreement—even though it’s not quite legally binding—will show that everyone previously agreed on a precedent in writing. That’s a powerful defense in the eyes of the law.