What is Founders Agreement Drafting?
A founders agreement is a legal contract between co-founders of a company. It outlines important terms, such as ownership, intellectual property (IP) rights, and other core elements so that there’s clarity. By having this agreement professionally drafted, you can reduce your risk of disputes.
Read the rest of this article to explore what’s usually included in a founders agreement, how to draft it, mistakes to avoid, and why hiring a lawyer can help you with the founders agreement drafting process.
What Key Terms are Included in a Founders Agreement?
A founders agreement usually contains the following core components:
- Roles. All founders’ duties and responsibilities need to be specified. This should also include voting rights.
- Exit. Should one founder want to leave the company, there should be clarity about the processes involved.
- Commitments. This explains how much time and effort founders are going to commit to the company’s growth.
- Decision making. There needs to be clarity about which founders can decide on major issues to prevent gridlock.
- Restrictions. There might be restrictions for founders. A common example is that founders aren’t allowed to start companies that could compete with the primary business.
- Dispute resolution. Should disagreements arise that founders can’t resolve on their own, the agreement should specify how they can be settled, such as via mediation or arbitration.
- Code of conduct. Some founders agreements include a code of conduct to ensure founders are aligned in terms of their values and strategies.
What are Tips for Drafting a Founders Agreement?
When drafting a founders agreement, you should consider more than just the key terms. Here are some tips to think about so that you draft a clear, professional contract to guide your working relationships.
Include Founder Removal Provisions
At the start of your agreement, you might not think about your co-founder relationships going sour, but this could happen. It’s important to include a clause in the agreement for how to handle the situation of a founder being removed for misconduct. This will allocate their duties and shares, while preventing operation delays.
Consider Deadlocks
There could be times when making decisions is challenging. To deal with them effectively and without disputes, your founders agreement should include a deadlock clause with effective provisions, such as asking a neutral third party to assist in the decision making.
Avoid Generic Online Templates
Although you might be tempted to use a generic template for your founders agreement, this can be risky. Your contract should be customized according to your specific business model, founders, and goals to make it comprehensive.
Clarify Your Founders
You should include a list of all founders, with their legal names, addresses, and contact information. This provides clarity about who is officially a founder, which will avoid future confusion if you add more founders to your company.
Define Equity and Vesting
You want to ensure you fairly split ownership, such as according to the founders’ expertise and/or investments in the company. It’s common for startups to make use of vesting schedules so that if a founder exits early, unvested shares go back to the company.
Write Down Key Roles
Your founders agreement should include founder titles and responsibilities. This helps all parties to know what’s expected of them while preventing power issues.
What are Mistakes to Avoid in Founders Agreement Drafting?
To prevent stressful legal or financial risks, you should avoid making some common mistakes. These include the following:
- Vague wording. Every clause in your founders agreement needs to be clear and specific to avoid confusion that can lead to disputes. For example, if responsibilities are ambiguous, essential tasks could be neglected, causing arguments.
- Lack of IP ownership. Without clearly defined IP ownership, this can put founders at risk of infringement. There’s also the risk that a founder exits the company and claims ownership of the company’s important technology or processes.
- Lack of agreement review. You should review the founders agreement periodically so that it's updated and relevant, especially if your company grows or founders change.
Do You Need to Hire a Lawyer for Founders Agreement Drafting?
Although you don’t always need to hire a lawyer to draft your founders agreement, it’s advisable to do so. A lawyer won’t just draft your document, but anticipate your level of risk so that you have a solid agreement in place to protect your interests and the company.
A lawyer will help you when drafting a founders agreement by:
- Establishing the correct ownership structure so that all allocations are accurate and fair to founders.
- Preventing future disputes, such as by identifying potential conflict areas and including a dispute-resolution method for resolving disagreements.
- Creating vesting provisions so that the company is protected should a founder leave earlier than expected.
- Drafting the founders agreement so that it’s clear and specific to avoid confusion or uncertainty.
- Customizing the agreement so that it’s aligned with all relevant laws and regulations. This prevents legal risks that can harm the business.
- Reviewing your founders agreement if you’ve already drafted one. This will give you peace of mind that the contract is legally valid.
Where to Find a Lawyer for Founders Agreement Drafting
If you need to hire a lawyer to draft your founders agreement, you don’t have to ask people you know for recommendations. You can easily and quickly connect with a qualified lawyer on an online legal platform.
ContractsCounsel is an online legal marketplace that gives you access to a network of vetted lawyers. Connect with a lawyer who’s experienced in contract drafting and review to give you peace of mind that your founders agreement is clear, reasonable, and legally valid.
To request the drafting of your founders agreement from a lawyer on the ContractsCounsel platform, follow these steps:
1. Go to the ContractsCounsel marketplace, where you can post your project for free. Include a few details to match with the best lawyers.
2. Receive lawyer bids. You’ll receive multiple bids from lawyers directly on the platform who can assist you.
3. Once you receive the lawyer bids, you should review the lawyers' profiles. There’s lots of info on the platform to help you choose the best lawyer, such as their location, client ratings, years of experience, and field of expertise.
4. Connect with a lawyer you think is best suited to your requirements and hire them.
