Get Your Founder’s Agreements in Place first, it could be a painful experience later!
A Founders’ Agreement is a contract that a company’s founders enter into that governs their business relationships. The Agreement lays out the rights, responsibilities, liabilities, and obligations of each founder. Generally speaking, it regulates matters that may not be covered by the company’s Operating Agreement. And, you must have a Founder’s Agreement in place.
What if someone wants out of the business soon after or much later, becomes uninterested, gets a job with better pay, disabled, or dies? If one of your partners leaves for any reason, how will the remaining partners value the company at that time, and how should shares be divided, who should get what, how about the IP? It’s important to make sure all partners starts the venture on the same page, with their roles set forth and with an agreed upon framework and standards in place for problematic situations likely to come up later on. trying to solve inherent problems later can take months and cost a lot of attorney fees, and it often unravels the startups and friendships.
Creating a Founders’ Agreement
Here is what you need to know:
- Do it as early as possible. A founder’s agreement is one of those things that lingers unless you hold yourself strictly accountable to a date. And do it as soon as possible, as you gain traction things may get ugly! By the way, one of the biggest reason partnerships and founders separate and startups dissolve is the disagreement amongst them. It’s always human nature!
- Please Do Not Use A Template! There are many templates for founder’s agreements available there are plenty of templates available online for you to peruse. Although Templates are just a starting point they are just already made templates! And will not have necessarily the final language you may need! Ask yourself a very simple question, if those templates were so good, why would they be plastered all over the internet? You get our point. (We have seen too many startups dissolve simply because they sued a web based template and templates to get their legal documents in place. This is as dangerous as driving without brakes on your car. It’s going to hurt you sooner or later!)
- There are many other resources for you to use. Which we listed at the end of this article.
- Make Sure All Co-Founders are on the same page and in total agreement. Try to get aligned on the fact that you agree that this is necessary and will help both of you. Go through one by one the issues – compensation, equity, vesting schedules, roles and responsibilities, termination clauses- and talk it through. This will likely take several rounds of discussion. You want to walk away on the same page on all the major issues. This is easier said than done, but try to reinforce that you are both doing it to benefit everyone including the business.
- You Must Take Your Agreement to an Attorney. Your agreement will give them a good start and experienced attorney’s in this area will be able to fill in the blanks. In addition, the attorney can act as a go-between for you and your co-founder if there are issues you can’t resolve. Lawyers aren’t free but they can add a lot of value in getting an agreement in place that everyone supports.
- Review – Separate and Together. The lawyer should prepare a draft agreement for you and your co-founders. You should read it separately and then go through it together to lay out differences and points that need more discussion or clarification.
- Finalize and Sign. Bring your collective comments back to your lawyer and have him prepare a final agreement for review and signature.
Reference and reading material:
The perfect Founders agreement: https://fi.co/insight/how-to-create-the-perfect-cofounder-agreement-with-your-business-partner
To have access to many other reference materials from legal teams and vetted resources on this subject matter please send us an email and we will send you a vetted and screened list of references that will help you create the best Founder’s agreement. Email to: info@startup-port.com
Disclaimer:
These documents posted on our website are intended to educate and inform the early stage start-up. As such, they are designed to be simple and accessible and may omit terms or language relevant to your very specific circumstances. Please carefully read through the documents and any instructions and annotations included therein. You acknowledge that your use of these documents does not create an attorney-client relationship between you and Startup Port Knowledge Base or you and the individual members of Startup Port and does not constitute the provision of legal advice or other professional advice. You should seek advice from a licensed attorney before using or relying on these documents. Additionally, none of the documents created constitute tax advice. By using and relying on these documents, you assume all risks and liabilities that may result from such.