What is a founder agreement?

A founder agreement is a legal document that outlines the roles, responsibilities, ownership stakes, and expectations among the founders of a startup company. It typically covers important aspects such as equity distribution, decision-making processes, intellectual property rights, and dispute resolution mechanisms.

Why is a founder agreement necessary?

A founder agreement helps to clarify the terms of the partnership among founders and mitigate potential conflicts or misunderstandings in the future. It establishes a framework for how the company will be governed and operated from the outset.

Why is a Founders Agreement important?

• Clarifies Roles and Responsibilities: Clearly defines what each founder is responsible for, avoiding overlaps and ensuring accountability.
• Prevents Disputes: Provides a clear framework for resolving conflicts and making decisions.
• Protects Interests: Safeguards the rights and interests of each founder, including equity distribution and intellectual property ownership.
• Sets Expectations: Establishes clear expectations regarding time commitment, contributions, and exit strategies.

What key elements should a Founders Agreement include?

• Equity Split: How the ownership of the company is divided among the founders.
• Roles and Responsibilities: Specific duties and obligations of each founder.
• Intellectual Property (IP): Ownership and rights related to IP created by the founders.
• Decision-Making: Processes for making major business decisions and resolving disputes.
• Vesting Schedule: Timeline over which founders earn their equity to ensure long-term commitment.
• Exit Clauses: Conditions under which a founder can leave the company and the consequences of their departure.
• Non-Compete and Confidentiality: Clauses to protect the company’s interests from competition and unauthorized disclosure of information.

How is equity typically divided in a Founders Agreement?

Equity is usually divided based on factors such as:

• Contributions: The amount of capital, time, or resources each founder brings to the table.
• Roles and Responsibilities: The significance of each founder’s role in the company.
• Experience and Skills: The expertise and skills that each founder contributes to the business.

What is a vesting schedule and why is it important?

A vesting schedule determines when founders earn their equity over time, typically to ensure they remain committed to the business. Commonly, equity vests over a 4-year period with a 1-year cliff, meaning a founder must stay with the company for at least one year before earning any equity, and then earns equity monthly or quarterly thereafter.

What happens if a founder leaves the company?

The Founders Agreement should outline:

• Buyback Rights: The company or remaining founders’ right to buy back the departing founder’s equity.
• Vested vs. Unvested Equity: How much equity the departing founder retains based on the vesting schedule.
• Non-Compete and Non-Solicitation: Restrictions on the departing founder’s ability to start a competing business or poach employees.

How are intellectual property rights handled in a Founders Agreement?

Typically, the agreement states that all IP created by the founders related to the business is owned by the company. This ensures that the business retains control over its key assets.

Can a Founders Agreement be amended?

Yes, a Founders Agreement can be amended, but any changes usually require the consent of all founders. It’s advisable to include a clause outlining the process for making amendments.

When should we create a Founders Agreement?

A Founders Agreement should be created as early as possible, ideally before or immediately after starting the business. This helps ensure that all founders are aligned and that the business starts on a solid legal and operational foundation.

Having a well-drafted Founders Agreement can greatly contribute to the long-term success of a startup by providing clarity and preventing potential conflicts among the founding team.