Company Incorporation and Founders Agreements
• 17 Dec 21
If you are planning to run your Startup business alongside co-founders, creating a Founders Agreement is an excellent choice to help your team plan and strategize critical elements of the business relationship. Let’s explore some of the components involved with drafting this type of legal document.
What is a Founders Agreement?
Founders Agreement contracts are legal documents designed by and for business partners who are heading into a Startup venture together. The document will serve as a blueprint for the basic purpose of the business, along with more intricate details such as the individual roles, responsibilities, and liabilities assigned to each partner.
A carefully crafted Founders Agreement should capture the details of all pertinent procedures that serve to regulate the relationship between co-founders and the function of the company. The Founders Agreement serves as a legally protective measure for all parties and will also outline the procedure for entering or exiting the partnership.
Fundamentals of a Founders Agreement
Although it differs from business to business, the following section takes a look at some of the fundamental aspects to be included within a comprehensive Founders Agreement:
Name of Company and Founders
While this may seem like the obvious first step, it can often be overlooked. Make sure to start by clearly and accurately recording the name of your Startup, as well as the full names of each co-founder. Make sure to take the proper steps in ensuring that the businesses’ name has not been taken by another company to avoid potential legal implications.
This section of the agreement should clearly state the purpose and function of the Startup. This may include a brief overview of the business plan and actions the business will take to achieve its goals. It should also cover some information on where each founder’s interest lies and various specifics as to how those interests tie into the ultimate business plan.
Here, you will determine what percentage of the company each member will own. This number is subject to change based on co-founders leaving or staying with the business. Should the company function as an LLC, it is advisable to discuss what percentage of management interest will be assigned to each co-founder. In this case, it is critical to identify which members will simply function as co-owners and who will take on active management roles within the business structure.
Roles and Responsibilities of each Co-Founder
Many Startup business co-founders have fallen victim to neglect this vital step. Oftentimes, the roles and responsibilities of each member have been verbally agreed upon based on countless discussions and business-meetings; however, this is a fast-track to misunderstanding and dispute. Founders Agreements should clearly define every single aspect of the individual roles and responsibilities for each co-founder. The document will be signed by all members and can be used for future reference when needed. A formal record of the roles and responsibilities acts as a precautionary measure against any contention regarding who does what (and when, and why, and how).
Salary and Compensation
This can be a tricky area, since a Startup business can often take some time before turning over a profit which enables co-founders to pay themselves a salary. However, every business is different and therefore this step should be carefully considered and tailored according to company capacity. The Founders Agreement should clearly state which members (if any) will be compensated, how much they will receive, how often payments will be made and any other rules and regulations concerning such payments. For example, a clause may be included to confirm that if the company should run into financial difficulties; the payments will come to a halt until further notice.
This step is taken to safeguard against any unnecessary resources being used in the case of disputes between or among co-founders. Dispute resolution clauses are terms within the Founders Agreement contract which serve to resolve disputes as either binding or non-binding solutions. Often, co-founders select to include rules that require the use of Alternative Dispute Resolution such as arbitration or mediation, as opposed to going to civil court to settle the matter.
Ultimately, the purpose of Dispute Resolution clauses is to secure an inexpensive and less exhaustive procedure for settling disputes, ensuring that such a process is settled as amicably as possible.
Intellectual Property Rights
Every aspect that goes into making your Startup business unique is referred to as Intellectual Property, which could be anything from unique designs, ideas, and blog posts to trademarks and patents. As a general rule of thumb, anything created by and for the company should be considered valuable IP. Some companies include work materials such as computers and phones as part of their IP arsenal. For the Founders Agreement, a clearly defined outline must be agreed upon by all co-founders as to what they consider to be company IP, what the terms are regarding selling the IP, how the profit is allocated, and who gets to make the final decision.
Employee Stock Options
Stock options refer to the right to buy a specific number of shares within the company at a set price, by a certain date. As Directors exercise a fundamental duty to act in the best interests of the company, the adoption of a stock option plan can assist in creating heightened employee loyalty and attracting the best talent. Having a Board Resolution that explicitly states the approval procedure where a stock option can arise is therefore useful in setting out employee expectations from the get-go.
The shareholders’ agreement sets out the rights, obligations and restrictions with respect to company shareholders, and typically covers matters such as restrictions with respect to the sale of shares, as well as the way certain corporate decisions are made.
It is always best to plan ahead, which is the very basis of a Founders Agreement. Make sure to outline any circumstances that would lead to the immediate disbanding of the Startup and clearly state the terms of co-founder departure to avoid any unwanted issues. For example, what would happen if a co-founder dies, becomes ill, or goes bankrupt? What if a member chooses to leave for personal reasons? What does this mean for company shares and buyout rights? These are all critical aspects that will facilitate a seamless exit procedure.
Much like any commercial relationship, the proper documentation of parties’ rights and obligations can set the stage for a successful and productive relationship from the outset. While there are various other aspects to be considered for a thorough Founders Agreement document, we hope these fundamental aspects have provided you with some of the basic elements to include in this document.
When it comes to legal basics, it can seem overwhelming at first. But, it doesn’t have to be. GLS offers a host of free Startup resources to help set you on your way. You can also browse our list of over 200 Legal Templates and Tools, to choose the products your Startup needs at each critical stage of business.
We also offer a wide range of subscription based Legal Support Plans created specifically for Startups who want a 360 degree service in creating their own virtual legal dept.
*The above content does not constitute, nor is it offered as, legal advice of any kind. GLS Solutions Pte Ltd is not a law firm and any support provided pursuant to this entity is not regulated legal advice or legal opinion.