How to Create a Founders Agreement for Your Startup

Starting a company is not an easy journey, itis filled with lots of ups and downs. Taking on this path alone can feel overwhelming. For many entrepreneurs, having a co-founder makes the journey more rewarding and enjoyable.

Having a co-founder allows you to work with someone whose skills complement your skill set, but also gives you the chance to share challenges and celebrate success together. It doesn't matter how good is your relationship with your partner, disagreements are inevitable. When clashing opinions surface, a founder's agreement can be invaluable.

What is a Founders Agreement?

A founders agreement is a legal contract that defines the business relationships among the founding team. It gives the founder’s rights, duties, liabilities, and obligations. This agreement ensures the team is aligned and clear on their role in the venture.

A founders agreement should be established as early as possible, even before forming a legal entity. These agreements help define each founder’s role and support in handheld disputes. It also shows potential investors that you are committed to the business. Failing to have a contract in place to cover these issues can raise a red flag for investors as it signals a higher risk of conflicts, misunderstandings, and poor governance. Having a well-structured and carefully considered founder agreement in place at the right time can aid in your fundraising efforts by reducing your startup from the perspective of potential investors. It demonstrates the thoughtful planning and effective management of the founders.

How to Create a Founders Agreement for Your Startup

A founders agreement covers things like who owns ownership structure and intellectual property rights to determining which co-founder has the authority to make key decisions. In short, every startup needs a Founders Agreement!

Why is a Founders Agreement important?

A founders agreement covers everything from an ownership structure and intellectual property,and determining which co-founders have the ideal set by the company before launching. It can cover everything from who is involved, how much each person will contribute, the roles and responsibilities of all co-founders, ownership of shares, and what happens if someone leaves.

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Is a Founder Agreement Legally Binding?

Yes. It's a legally binding contract that protects each founder's interests. It should be created at the beginning of the company's journey to make sure everything is clear before the co-founders jump in together.

Basic steps to creating a Founders Agreement

Choose a format

Your founder's agreement should be tailored to fit both the founders and the startup. While there's no fixed format for a founder agreement, here are some key things you should consider including in yours.

Names of Founders and Company

It is essential to mention the names of the Founders. Also, it includes the name of your startup, even if it might change later. The importance of a startup name is hard to overestimate that's why choosing one can be so stressful. A great name can grow your company, but a bad one can hold you back before you even start.

Ownership Structure

This is where you decide how much of the company (equity ownership) each member owns. This can change as people join or leave the company. If your company is an LLC, you should also figure out who has what percentage of control over the company.

In your founder's agreement, you need to make it clear if each person is just an owner or if they will also have a role in management and what those roles and responsibilities will be.

The Project

The Project simply means “your startup.”In this section, write a sentence or two about your business plan. Include a broad overview of what you're doing, each founder's involvement, and many details specific to your startup. Think of the broad overview as your elevator pitch and the specifics as what you'd say tell someone who's asking for more details about what you're making.

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Confidentiality, non-disclosure, and non-competes  

A confidentiality clause is an important part of a founder's agreement. It ensures that the business ideas and concepts stay private. The agreement should also state whether a founder is restricted from joining or setting up a competitor’s business. Non-disclosures and non-competitive clauses should be written carefully.

Review and sign! 

Finally, give each co-founder time to review the founder's agreement, consult a lawyer if needed, and then sign and date it.

Once everyone has signed and dated it, the document becomes legally blinding. Make sure to store an electronic copy with all the signatures in a place where the whole team can access, it for future reference.

Conclusion

A founders agreement is one of the first documents you should sign when starting a new business. Don’t depend on friendships or informal deals. Get expert advice and ensure that your and others' interests should also protected.