Founders Agreement Definition: Everything You Need to Know
The founders agreement definition describes the distribution of equity among the firm's founders and how much time must pass before the shares fully vest.3 min read
2. How to Create a Founders' Agreement
The founders agreement definition, more commonly known as a shareholder agreement, is a written document that describes the distribution of equity among the firm's founders and the length of time that must pass before the shares fully vest. It also includes the responsibilities and roles of the founding members, their invested equity, their various undertakings, and their projections and goals. A founders agreement is drafted during the initial incorporation of the business.
The purpose of a founders' agreement is to avoid any ambiguity that might develop in the future in regards to the company's management and business relations between founders. The agreement identifies potential complications and risks and provides provisions to deal with them should they arise. As a legally binding document, it must be detailed and lack any loopholes that may be exploited later. It is always a good idea to draft a written agreement after seeking an expert's counsel regarding the business's requirements and intentions.
Essential Elements of a Founders' Agreement
The essential clauses that are typically included in a founders' agreement include the following:
- Business definition. Describe your company's venture and purpose in as much detail as possible.
- Ownership. Ownership will typically be distributed in shares or percentages of the company's value.
- Roles and responsibilities. Assumptions about individual roles and responsibilities can be a significant source of conflict within a business. Do not shy away from thoroughly defining the parameters of each person's role. These expectations can be as simple as one person running the business while the other person remains the silent partner.
- Initial funds contributed. Be sure to include who contributed what to the company's initial development. Keep in mind that you'll likely want to set aside at least 10 percent of your funds for future hires, which leaves 90 percent of your funds to work with. Remember that co-ownership does not necessarily mean equal ownership. It's important to have that conversation at the very beginning of the company's formation.
- Assets contributed. Include any tangible assets contributed to the business in order to maintain clarity around who owned what before the venture started.
- Payback and reimbursement methods. If members have required payback, include the specific details and method of reimbursement. Consider market vesting terms for each founder's equity in case they decide to split. This means that founders must contribute to building value in the company in order for their equity to grow. Typical vesting terms occur monthly or quarterly over a few years.
- Conflict resolution. It's crucial to include procedures for resolving conflicts, as they are an inevitable part of any long-term business operation. Options include binding arbitration or engaging a neutral third party whom everyone trusts.
- Intellectual property (IP) assignment. Once your business develops a business plan or begins to expand on a platform or product, you have begun creating intellectual property. Designate what belongs to your company and how it will be used appropriately in order to protect your ideas. It is important to define how IP belongs to your company and not to individuals such as owners, employees, contractors, and consultants.
- Milestones. Detail important milestones that must be met and what work must be completed in order to reach them. You'll be able to reference your achievements to know when to take the next step.
How to Create a Founders' Agreement
First, commit yourself to have serious discussions with your co-founders about each person's role, equity, compensation, vesting schedules, termination clauses, and any other crucial concerns, as mentioned above. Take the time to nail it down now so that future issues remain minimal.
Consult a startup attorney. A legal professional can assist you in understanding what your agreement is missing, and what issues could arise from your agreement. The cost of hiring a lawyer will be worth ensuring that you and your business avoid any mistakes that could have been prevented. As you'll be enlisting the help of a legal professional should any complications arise, get them involved now to prevent it from happening.
Once intentions and objectives are clear, have the lawyer draft a sample founders' agreement. Review the document in detail with your co-founders. The entire process may take three to four working days.
If you need help with a founders' agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.