The founders’ agreement is the contractual arrangement concluded among the founders of a new company In order to ensure its success and viability.
The areas usually covered are:
- Roles and responsibilities: it is important to make a clear delimitation of roles and understanding of responsibilities from a personal perspective, but also for the others. There are different ways to achieve the division:
- collective decision-making: one of the most used ways of structuring a newly founded company is by sharing responsibility for every decision. It is not necessarily the best approach as it may not take into account previous experience, it diminishes personal responsibility and might be too time-consuming. It is advised mostly for small-sized companies or family businesses.
- division of responsibilities: a clear separation might not only make the company more structured, but also more productive as each co-founder could be responsible for a certain area, ideally of their expertise.
- Liability: setting up liability is an important factor related to decision-making and risk management. It might be joint or personal depending on the consequences of the decision and the share of responsibility the co-founders had in the outcome.
- Equity ownership and vesting:
- equity: it relates to the part of the company that will be owned by the shareholders, and it is not necessarily equal among co-founders, but proportional to the share with which they contributed to its creation. On the other hand, there is usually an emergency and investment fund to which all founders contribute from the beginning.
- appropriate market vesting terms: these terms should be negotiated and included in the founders’ agreement as it influences the risks the company is taking. There should be a prospective schedule that allows the founders to predict and plan their return on investment while not interfering with business viability.
- Intellectual property (IP) rights: it is important to delimit between IP rights that belong to the company and those which are maintained by natural persons (either co-founders, employees or external consultants).
- Termination: it is important to include from the beginning the terms for the company’s dissolution and the conditions in which they apply. It establishes clear rules related to division of equity and IP rights as to prevent litigation particularly once the business takes off.
It is better for a founders’ agreement to be all encompassing rather than relying on court rulings as to the interpretation of different provisions and thus jeopardizing the future of the company.