Aidi — Founders agreement
You’ve probably heard this before - that the best kind of consent or agreement isn’t one that is just verbally given but documented and signed by both parties. This is true for founders too, signing a formal agreement is fundamental. In spite of the popularity of founders agreement, Yet, Forbes lists the absence of a founders’ agreement among the top 10 legal mistakes made by startups.
In the words of Noam Wasserman, every decision taken by the founders of a startup should be made by design and not by default. The founders agreement helps put this in perspective. It ensures that plans are put in place for possible problems that are likely to arise as the business grows and, that the interests of all involved parties are protected. The rest of this article will explain what a founders agreement is, why it is important and, the core elements of an agreement.
A founders agreement also known as a shareholders agreement is a legally binding document between the cofounders of a startup. It spells out the roles, responsibilities, ownership, rights, conflict resolution, and other aspects of the business that are quite important to be documented between founders and the startup. It is important to regulate matters that aren’t governed by any kind of operating or financial agreement with investors and for a clear definition of expectations and responsibilities between the founders.
So, why is this agreement necessary? Do co-founders who are and have been long-term friends or even family need this sort of agreement? Here are specific reasons why you should have one regardless of the relationship or the ties you have with your co-founder;
- It spells out the responsibilities of the owners:
A founders agreement helps the cofounders understand what each person will be doing from inception through each phase of the business. An agreement simply makes ownership, titles and accompanying duties really clear.
- Provides structure for conflict resolution:
Conflicts are bound to happen between people working towards a common goal. Hoping that this doesn’t happen or entirely avoiding it is one to kill the business. A founders agreement helps ensure that when this happens, there are measures put in place to ensure that disagreements are addressed and resolved appropriately.
- Protects minority owners:
Sometimes, cofounders may not have equal business ownership due to varying factors. This agreement helps protect the interests of minority owners outlining what they own and are entitled to, the responsibilities they have towards the organisation and ensures that the majority owner does not take advantage of the other minority owner’s agreed roles and responsibilities.
Now you have decided to take the step and create an agreement. Here are some key areas the agreement should cover
Do not just assume that the CEO, COO, and CTO amongst other titles define what everyone should do. A founders agreement should spell out in clear terms, who handles what and what is expected of each person according to their skills and strengths. This helps to ensure that everyone is handling various aspects of the business and not encroaching on another’s responsibilities.
Your agreement should state the various rights and rewards of all the founders. It should show who sits on the board, who makes the final decisions, who gets a certain percentage of the business, salaries the founders are entitled to and the modification process for changes, etc.
It should stipulate if the founders are on board on a full-time or part-time basis. It should also lay out if the business owners are allowed to consult or provide advisory services to external organizations while fully employed in the business. The intellectual property of the startup should also be taken into consideration. Your agreement should address if founders are permitted to claim ownership of some IPs created, and what happens if the founder who developed or created any of your IPs decides to leave. Your agreement should introduce appropriate IP assignment provisions. Do not leave anything to chance or gloss over this.
Sometimes, unforeseen events happen. This may be the death of a cofounder etc. Your agreement should make room for possibilities like this. It should state what will happen if any member of the founding team dies or gets ill for an extended period or simply wants to leave the business. It should also cover the minimum vesting period for equity, among other things.
Your agreement can also cover - shares distribution, conflict resolution policies, confidentiality, exit procedures, dissolution and termination clauses, etc. In subsequent articles, we will show you how to create a simple agreement (with templates included) and the next steps to take after this has been done.