A Founders agreement is a legal document that outlines the rights, responsibilities, and obligations of the founders of a company. It is essential for any startup to have a founder agreement in place to prevent disputes and ensure a smooth operation of the business.
We have listed some key elements to consider when drafting or reviewing a founders’ agreement below:
Ownership and Equity: As Co-founders, there is a need to clearly define the ownership stakes and equity distribution among the founders. This includes the initial allocation as well as any future equity issuances or transfers.
Roles and Responsibilities: You also need to outline the roles, responsibilities, and decision-making authority of each founder. This helps establish clear lines of communication and avoids conflicts over decision-making as the goals of co-founders differ.
Vesting schedule: You also should implement a vesting schedule for the founders’ equity to ensure that each founder earns their ownership stake over time. This helps protect the company in case a founder exits early on.
Intellectual Property (IP): There is a need to specify how the company will own and protect its intellectual property, including inventions, patents, trademarks, copyrights, and trade secrets. It is crucial to clarify from the outset that any IP developed by the founders in relation to the business belongs to the company.
Founders’ Restricted Rights: The rights of founders should be restricted based on the interests of all stakeholders. The restriction of the rights helps the company to have a smooth running while balancing the interests of all stakeholders.
Pari pasu clause: There is a need to ensure the inclusion of the pari pasu clause to ensure that there is fair and equal treatment of all creditors and investors in the event of any financial wreckage, insolvency, or bankruptcy as well as dividends.
Pre-emption clause: The Pre-emption clause gives an opportunity to existing shareholders or partners as well as investors to purchase additional shares or ownership interests before those shares are offered to third parties. This helps to maintain control and ownership stability within a company.
Strategic appointment: The appointment process of key individuals in a startup must be strategically dealt with within the organization. This complements the efforts of the entire team and makes fundraising seamless or more effective.
Tag-along rights: There is a need to include a clause that gives tag-along rights to minority shareholders as this helps the minority shareholders to tag along with majority shareholders and gives them the option to sell their shares on the same terms and conditions as the majority shareholders.
Dilution Protection: The dilution or otherwise of shares upon issuance of new equity in subsequent financing rounds is something to be considered and included in a founders agreement. This helps to address the concerns of early investors who fear that their ownership and influence in the company will be significantly diminished as more shares are issued.
Equity Distribution: Being a critical aspect of fundraising, especially in startups and early-stage companies, there is a need to clearly state how ownership interests or shares of a company are allocated among various investors or stakeholders when the company raises funds through equity securities.
Non-Compete and Non-Disclosure: Include provisions that prevent founders from competing with the company during their involvement and for a period after they leave the start-up. Additionally, ensure that confidentiality obligations are in place to protect sensitive information.
Capital Contributions: Co-founders must also state the initial capital contributions required from each founder and establish guidelines for future funding rounds or additional capital needs.
Dispute Resolution: There should be clearly stated, a mechanism for resolving disputes among the founders, such as mediation or arbitration, to avoid costly litigation.
Exit Strategy: A Founders’ Agreement should address how a founder can exit the company, whether through sale, buyout, or other means.
Termination: There is also a need to establish grounds for termination of a founder’s involvement in the company, such as breach of the agreement, misconduct, or failure to meet performance expectations.
Governing Law and Jurisdiction: The Agreement should specify the governing law and jurisdiction that will apply to any disputes arising from the founders’ agreement.
The issues surrounding the founders’ agreement are multifarious and multidimensional in nature and will attract varying complexity depending on the present individual needs. It is important for interested founders to consult with qualified legal professionals experienced in startup law to ensure that the founders’ agreement adequately addresses their unique needs and circumstances. This will help protect the interests of all founders and promote a successful and harmonious startup journey.
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