Founders' Agreement: Essential Parts, Reasons to Have

Founders’ agreements are contracts that a partner presents to other founders for the pre-incorporation of a startup. It also defines the roles, responsibilities, and liabilities of each partner. They also assign IP rights among co-founders. A founder’s agreement is essential when demonstrating the seriousness of your startup.

A founders’ agreement is an excellent choice for helping you organize and plan key details around your new business relationship. You will want to get ready in advance to attract new investors and carefully plan your company’s future.

Legal mistakes can leave your agreements unenforceable or full of loopholes that attract disingenuous people. Here’s everything you need to know about founders’ agreements.

Steps to Create a Founders’ Agreement

The process of creating a founders’ agreement will look different for every startup. Your approach will depend on a company’s scale, scope, and size. However, there are a few commonalities regardless of your industry or location.

Here’s how to create a founders’ agreement:

Step 1. Decide if a Co-Founder Relationship Is the Right Fit for You

Start by ensuring that you align with your partners, including goals, values, expectations, and work style. The most common cause for a business dispute is differences in opinion regarding forming a partnership or limited liability company (LLC).

Critical questions to ask include:

• What are my objectives?
• What are my values?
• How do I measure success?

While you may not find a group of people that you agree with 100 percent of the time, it is critical that you at least align in common areas.

Step 2. Establish Roles and Responsibilities

Your startup may consist of two people covering multiple roles. If you are more prominent, then you can delegate responsibility across your entire team. You must negotiate and assign these roles before setting anything in stone.

Roles that you may need to fulfill include:

• Chief executive officer (CEO)
• Chief operating officer (COO)
• Chief financial officer (CFO)
• Chief marketing officer (CMO)
• Chief technology officer (CTO)

Your team may consist of just a CEO and CTO. It depends upon how many founders are on board. You could also discuss the recruitment of new founders to fulfill these roles as well.

Here is an article about various roles at a startup.

Step 3. Make Critical Legal Decisions

Legal mistakes are another common downfall of new startups. While you do not have to go to law school to run a company, you should familiarize yourself with critical legal issues and decide how your company will handle them.

Issues that you will want to address may include:

1. Safeguarding your intellectual property or IP assignments
2. Creating co-founders’ vesting schedule on share issuance
3. Determining how to handle the departure of crucial founders
4. Establishing day-to-day company management
5. Learning the definitions of basic legal terms
6. Deciding on the particulars of corporate bylaws

Step 4. Determine Equity Compensation Rules

You also need to decide on how the co-founders will share equity among each other. It’s easy to assume that everyone gets a straight-line cut at fair market value (FMV). Depending upon contributions, talent, and resources, a co-founder could significantly increase their holdings in the company and negotiate a higher amount.

Step 5. Set Up a Meeting with Startup Lawyers

Once you have an initial plan fleshed out, it is time to bring your notes and team members to a meeting with a startup lawyer. They will spend time learning about your organization’s unique dynamics and objectives and translate them into a valid and enforceable founders’ agreement.

Step 6. Review the Initial Draft of Your Founders’ Agreement

You and the other entrepreneurs will receive a first draft copy of your founders’ agreement from your startup lawyers. Review it separately and together as a group. Ensure that the founders’ agreement is as you specified and note any changes that have occurred since your last meeting. Ask your legal representatives to redraft or finalize it for signing.

Step 7. Have All Founder’s Sign and Date the Agreement

The final step in a founders’ agreement is the signing and dating aspect. Once everyone puts their signature on the dotted line, a new relationship begins. You can make a ceremony out of the signing by getting the group together in person.

Sample Clauses from a Founder’s Agreement

Registration of the Company; Issuance and Purchase of Shares Clause

1.1. Promptly following the execution hereof, the Founders shall act to amend the corporate documents of the Company, in accordance with the terms herein.

1.2. The authorized share capital of the Company shall be GBP 2,500 divided into 25,000,000 Ordinary Shares, par value GBP 0.0001 each (the “Ordinary Shares” or “Shares”).

1.3. Issuance of Shares. The Founders shall be issued Ordinary Shares as follows:

i. TV - 3,666,666 Shares.

ii. A-Labs - 1,120,000 Shares.

1.4. Parties acknowledge that, subject to the approval of the Board (as such term is defined below), the Company shall reserve 480,000 Ordinary Shares of the Company, par value GBP 0.0001 each, constituting approximately 8.57% of the issued share capital of the Company for the purpose of grant of options to employees and service providers of the Company. Subject to applicable law, the terms of such grants shall be subject to the sole discretion of the Board.

1.5. Investment by the Founders. The Founders acknowledge that TV, directly or via a third party on its behalf, invested certain funds for the financing of the initial operations of the Company and paid certain payments to service providers of the Company on behalf of the Company prior to the date hereof. Such funds shall be invested under the terms set forth in the Share Purchase Agreement in the form attached hereto as Exhibit A.

1.6. The Ordinary Shares issued hereunder shall have the rights, preferences and privileges as set forth in the Memorandum of Association of the Company, attached hereto as Exhibit B (the “Memorandum”), as may be amended from time to time.

1.7. The Company shall provide each Founder a validly executed share certificate, representing the Shares issued in the name of such Founder and shall register the allotment of the Shares in the share register of the Company.

1.8. The Founders undertake to cause the Company to ratify this Agreement, including all schedules and exhibits attached hereto, by a shareholders’ resolution, and to take all the necessary actions to comply therewith.

Intellectual Property Clause

3.1. Each of the Parties hereby confirms that any and all intellectual property, developed by or for the Company using resources provided by the Parties, including intellectual property developed by the Parties in connection with the Project, shall be the sole and exclusive property of the Company, its successors and assigns, as shall be designated by the Company.

3.2. Nothing herein shall derogate from the rights of any Party in intellectual property developed outside the scope of this Agreement by himself, its employees or service providers.

3.3. Each of the Parties, hereby undertakes to execute any additional document required or advisable for the duly transfer of Intellectual Property to the Company and to fully cooperate with the Company in regards with this matter. In the event that the Company is unable for any reason whatsoever to secure any of the Founder’s signature to any document as set forth above, each of the Founders hereby irrevocably designates and appoints the Company and its duly authorized officers and agents, as his agents and attorneys-in-fact to act for and on his behalf and in its stead, to execute and file any such document and to do all other lawfully permitted acts to further the purposes of the foregoing with the same legal force and effect as if executed or done by such Founder.

Non-Competition Clause

5.1. The Founders agree not to compete or to assist others to compete with the Company in any engagement or activity related to the Project or otherwise support such activity, whether directly or indirectly, for so long as they hold shares of the Company or are members of the Board (or are entitled to appoint any of the members of the Board) and for one year after the later of the above lapses (the “Non-Compete Period”).

5.2. Each of the Founders undertakes that, during the Non-Compete Period, Founder will not solicit, approach or endeavor to solicit or approach any person or entity who, during the Non-Compete Period (i) was employed by the Company or provided services to the Company; and/or (ii) to whom the Company, or its subsidiaries, provided services, for the purpose of offering services or products which compete with the services or products provided by the Company.

5.3. Nothing contained herein shall be interpreted as preventing a Party from engagement in other activities related to virtual coins, not related to the Project.

Reference for all clauses:

Security Exchange Commission - Edgar Database, EX-10.1 8 ff12019ex10-1_inxlimited.htm FOUNDERS' AGREEMENT DATED SEPTEMBER 1, 2017, BETWEEN TRIPLE-V (1999) LTD. AND A-LABS FINANCE AND ADVISORY LTD., Viewed May 15, 2021, https://www.sec.gov/Archives/edgar/data/1725882/000121390019016285/ff12019ex10-1_inxlimited.htm.

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Reasons to Have a Founders’ Agreement

Founders’ agreements serve as the bedrock of a new business formation. They set the tone and lay the groundwork for how you interact and manage the business as a team. While it’s unnecessary to utilize a founders’ agreement, drafting one ensures everyone is in a lockstep position on every critical legal and financial issue associated with the business.

Reasons to have a founders’ agreement include:

• Reason 1 . Establishes ownership roles and responsibilities
• Reason 2 . Offers guidelines for dispute resolution
• Reason 3 . Provides rules surrounding the contract’s termination
• Reason 4 . Gives direction for handling a dissolution
• Reason 5 . Protects minority shareholders
• Reason 6 . Solidifies the seriousness of your business formation

Founders’ agreements are essential to a well-planned business venture when involving more than one person. They are also attractive investing tools since they signal to investors that you are organized and methodical, even when bootstrapping. Ensure that you have a founders’ agreement at the start of every new venture.

Essential Parts of a Founders’ Agreement

Like any contract, founders’ agreements contain standard provisions and guidelines. You will want to integrate them into your contracts to ensure that they are legal and comprehensive.

Essential parts of a founders’ agreement include:

• Roles and responsibilities
• Ownership structure
• Co-founders as managers
• Vesting schedules
• Percentage of shares distribution
• Voting rights
• Capital contribution requirements
• Confidentiality
• Contractual communication
• Dispute resolution
• Choice of law clause
• Representations and warranties
• Non-Competition Clause
• Promissory notes

There are several essential facets that you will want to consider when creating a founders’ agreement. However, these agreements are designed to be thorough so that you won’t miss a single step in the planning process.

Founder’s Agreement vs. Operating Agreement

There are key differences between a founder’s agreement and operating agreement, which include:

• Formation: A legal document known as an operating agreement, which is only used by LLCs, lays out expectations and rules for its members. A founders agreement, which solely applies to the founders, is typically drafted before the formation of the company. Contrarily, when partners form an LLC, operating agreements are made. If one recruits more partners than the founders, this can result in another disparity between the two. For instance, the LLC currently has three founders and two additional members. All five partners sign the operational agreement; however, the three founders only sign the founder's agreement.
• Objective: A founders' agreement, also referred to as a shareholders' agreement, outlines the roles and responsibilities of owners, the procedures for making important decisions, and limitations on the transfer of share ownership. Founders' agreements are used in conjunction with LLCs' and corporations' operating agreements and bylaws. Operating agreements and bylaws specify how a business will run, addressing issues like notification, meetings, voting rules, and director responsibilities. On the other hand, founders' agreements regulate the rights and duties of individuals who own the business and control its internal operations. Thus, if a company's operating agreement or bylaws give it its public persona, the founders' agreement aids in maintaining the bonds that hold it together.

Equity and Vesting in a Founder’s Agreement

There is no law requiring that co-founders share ownership equally. While many founders split company stock equally, others decide how much to distribute based on who came up with the business idea, who put up the most upfront investment, or who has the greatest contacts or experience.

• Vesting Schedule: A vesting schedule that specifies when each founder receives full rights to business shares should be included, along with a discussion of the percentage each founder receives. Include a provision outlining the prerequisites for equity ownership. Most businesses decide on a time-based vesting term to guarantee founders' employment for a predetermined time. With a one-year cliff, the typical term is vesting quarterly over four years. A one-year cliff signifies that the vesting won't begin for another year.
• Cliff Period: This is the initial period of time when a founder won’t receive anything more aside from the funds he has invested in the corporation until after they have worked for a prolonged period. If the founder, for instance, has agreed to work for a period of 10 year which includes a cliff period of 2 years, then he will earn the profit on his shares for a period of 8 years and has to work for the company for 2 years before he can collect profit on his equity. Moreover, the founder won’t receive anything from the equity he had invested if he quits before the cliff period is over.
• Venture Capitalist Interest: Founders are frequently asked to fix vesting on their shares as part of the investment arrangement when they enter into financing with any skilled angel investor or venture capital firm. The existing assets of a company are not the primary driver of VC investment at the early stages. In order to minimize the danger of a founder leaving, investors under the term sheet insist on a vesting condition for the founders. As a result, the shares given back will enable the business to retain and reward a replacement without significantly diluting the remaining founders' stake. Additionally, vested shares might not remain vested indefinitely, and if the company is undergoing fresh fundraising rounds, new investors might demand a reset in exchange for a significant payment.

Getting Help with a Founder’s Agreement

Getting help with a founders’ agreement starts by learning more and speaking with startup lawyers. As you can see, several key aspects go into these agreements, and mistakes can leave your company in hot water. However, not having a founders’ agreement can make your venture less attractive from an investment perspective.

Follow Through Completely

If you are taking the time to draft a founders’ agreement, follow through on your approach entirely. Contract writing with startup lawyers is more affordable than you think. Once you have obtained the final copy of your agreement, you will have reassurance in knowing that your co-founders are just as serious as you are when it comes to the vision.

Here is ContractsCounsel’s marketplace data on attorney drafting fees.

Don’t Make this Mistake

Avoid making the mistake of recycling another potentially unsuccessful startup’s boilerplate founders’ template online. Do it the right way and hire startup lawyers to create a bespoke document reflecting your new company’s true nature and values and attract investors that want to work with you.

Final Thoughts on Founders’ Agreements

The co-founders of a company sign a founder's agreement, which is a legal document or legal contract, when the company is still in the planning stages. It encourages the founders' mutual knowledge and open communication with regard to their roles, equity rights, and decision-making procedures. A founder's agreement aids in preventing disputes and creates a strong basis for the organization by addressing crucial issues such intellectual property rights, corporate governance, future funding, and dissolution clauses. To prevent any mistakes, a founder's agreement must be carefully planned before being written.

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