The founder’s agreement is an official contract/legal agreement that is executed between the co-founders of a company when they set up their business. This agreement states the roles/rights/duties/responsibilities/ownership stakes/liabilities/and the investment amounts of each founder. A founder’s agreement must be always prepared in the written format. Two or more partners can enter the founder’s agreement. They are called co-partners or parties. The objective of the founder’s agreement is to avoid any future disputes between co-founders. This agreement set outs the strategy of the founders, who have to act and follow the mandatory provisions in the agreement. The founder’s agreement also helps in handling occurrences such as the death of the co-founder/resignation of a co-founder.
ADVANATAGES OF A FOUNDERS AGREEMENT
- The founder’s agreement states the type of company that should be formed by the co-founders
- The agreement describes the vision and mission of the company. It also sets the short term and long-term goals that have to be achieved over a period of time
- The agreement designates the roles and responsibilities of the co-founders, in accordance with their area of mastery such as marketing/operations/finance, etc
- The founder’s agreement clearly specifies the structure of ownership basis the initial contribution made by the cofounder/or the percentage of the equity shares held by the cofounder in case of a company. This helps to avoid any future conflicts between the co-founders
- The founder’s agreement states the procedure that must be followed during the decision-making process. If a voting system is adopted, then it has to define the value of votes for each founder. It also provides the solution if there is a deadlock between the co-founders
- This agreement lays down the scheme of compensation that must be carried out, if any of the co-founders violates the provisions mandated. In such a case, the proportion of the compensation that will be paid to each co-founder is mentioned in the agreement
- Any co-founder can be removed from the company for indulging in fraudulent activities such as misappropriation of funds/sexual harassment charges/taking employment with other companies. This agreement will have a proper structure to handle these situations. It will also have a section which states the level of payment that has to made to the expelled co-founder
- There will a separate clause on confidentiality in the founder’s agreement. This is to ensure the founders do not reveal business secrets to a third party
KEY PROVISIONS OF THE FOUNDER’S AGREEMENT
- One of the most important sections of a founder’s agreement is the demarcation of equity ownership between the co-founders of the company. This equity ownership is determined by the consideration factors such as money invested/exposure, etc. This also evaluates the jurisdiction of the voting rights of each co-founder.
- If any one of the founders leaves the company, a proper pattern of vesting the shares must be stated in the agreement. The vesting of shares is done in two ways. Under the time-based vesting method, the shares of founders will be vested in proportion to the amount of years invested by them in the company. If any of the founders are relieved or ousted from the company before the expiry of his or her term, then the outstanding shares are reverted back to the company. In such a scenario, the performance of the founder is not taken into consideration
- Under milestone-based method, the shares will be vested, basis the milestones achieved by the company. If the founder exits the company before it achieves a certain milestone, then the shares of that founder will not be vested with him or her
- This agreement must have another important clause in regards to the restricted transfer of shares of the founder. There must be a clause of the lock-in period, which mandates the founder cannot transfer his or her shares for a certain period, before the expiry of his or her term. The method of valuation of the shares of the founder must also be settled before the expiry of his/her term
- The innovative ideas or inventions created by any individual remains his or her property. The agreement must explicitly state that the intellectual property rights developed by the co-founders are owned by the company. During the occurrence of any dispute, the IP of the company will not feature in such a situation. Most companies obtain intellectual property to start with in the name of co-founders. Later, the intellectual property is assigned to the name of the company. The valuation of the company is always determined by the intellectual property. This clause becomes very important to avoid future disputes
- There will be a clause that no founder will indulge in any activity that lays in conflict with the objective of the company. For example, if any of the founders decide to exit the company, then he or she will not be allowed to engage in any competitive business, for a stipulated period from the date of exit
- The employment of co-founders will always be full-time with the company. The agreement will clearly state the terms of employment/their roles/compensation details/and benefits available to each founder. There could be separate contracts in regards to the terms of employment among co-founders, which include their perks and benefits
- There must be an appropriate mode of dispute resolution mechanism stated in the in agreement to solve any future disputes between the founders. For example, if all the founders mutually agree to terminate the company, then the most preferred option to resolving such a dispute is arbitration, mediation, etc
PROCEDURE TO DRAFT A FOUNDER’S AGREEMENT:
- The draft of the founder’s agreement contains all the objectives of the company, the terms and conditions to be followed by the co-founders
- Once the drafting process is complete, the founders must check if all the mandatory provisions have been included. Also, they have to check if there are no ambiguous clauses in the agreement.
- Any additional information that is required must be entered in the agreement
- The final draft has to acknowledged and accepted by all the cofounders before it is finalized
- Once all co-founders agree to the agreement, it has to be notarized on a non-judicial stamp paper
- After the notarization process is done, all the co-founders have to sign the agreement.
- Before such an agreement is finalized it is always advisable to get expert guidance from our legal experts at ACE ALLIANCE to avoid any future disputes
DOCUMENTS REQUIRED FOR THE FOUNDER AGREEMENT
Once you get in touch with us at ACE ALLIANCE with your request to create the founder’s agreement, we will start the process. After our team receives all the details, our expert team of lawyers and attorney will create the founder’s agreement sample and send it across for your reference within 2- 3 business days. The price you pay for these services will include three rounds of iterations. Therefore, if you need any changes done to the founder’s agreement format, our team of lawyers at ACE ALLIANCE will do the needful.