Last updated on April 30th, 2021
What is a Founders Agreement
Founders’ Agreement is an official contract signed between all the co-founders of a firm stating all the responsibilities, ownership, and initial investments. It’s a legally binding contract and should be created at the beginning of the company’s lifecycle. It is an agreement which clearly sets out the strategy for issues such as ownership, board of directors, admission or resignation of partners, etc.
Benefits of a Co-Founders Agreement
- The founders’ agreement mentions the nature and type of entity by the co-founders thereby setting the proper path to follow.
- It also describes the vision and mission of the entity and sets the short term and long term goals over a period of time.
- It designates the roles and responsibilities of the co-founders, in accordance with their area of mastery such as marketing, operations, finance, etc.
- Additionally, it clearly specifies the structure of ownership pertaining to the initial contribution made by the cofounder or the percentage of the equity shares held by the cofounder
- This agreement also lays down the scheme of compensation to carry out, if anyone of the co-founder has violated the provisions mandated.
- The clause on confidentiality in the founders’ agreement makes an obligation for founders to not reveal the secrets of the business.
Points to Remember While Drafting the Agreement
- Roles & Responsibilities:
- Every co-founder is responsible for the actions that affect the business. As also a co-founder should also know his responsibility & his role in the functioning of the business.
- Decision making:
- Decision making plays a very important role. Furthermore, every co-partner should participate in decision making for simple & substantial decisions.
- Ownership of the founders:
- There also needs to be an allocation of ownership & equity among co-founders. Every co-founder should act in his capacity as a founder member of the company.
Key Elements in Founders’ Agreement
- Project Description
- Firstly, describe the purpose behind setting up of the company in an unambiguous manner to a large extent. It should be specific and not vague.
- Investments or Capital Contribution
- You must document the capital contribution made by each founder, questions such as would additional contributions be demanded, can contributions be made after inception of the company also need to be addressed effectively.
- Roles and Responsibilities
- Furthermore, the Agreement should clearly demarcate the roles and responsibilities of each of the co-founders of the company. Broadly, you can divide the roles and responsibilities of the co-founders as operations, marketing, administration and finance.
- Liabilities of the Founders
- This clause mentions that founders shall be severally liable for acts that amount to fraud, wilful negligence or doing or abetting any illegal acts.
- Intellectual Property
- The IPR must belong to the Company and not to any individual. This also protects the organisation if the individual decides to break away.
- Vesting Schedule
- A vesting schedule is a defence mechanism wherein a founder will only be given a percentage of his shares and that too, after the passage of some time while working for the company.
- Disputes Resolution Mechanism
- This specifies in the event of a dispute between the founders, what the governing law be, where shall all claims and proceedings arising under the agreement be brought, and which Court would have the jurisdiction to adjudicate this matter.
- Voting
- This clause makes it clear that, if there ever arises a dispute relating to the business, then the decisions shall be taken by way of a majority vote and the founder’s individual ownership share will determine their voting powers.
Founders Agreement Format
Download Founders Agreement Format for your Company
Founders Agreement Format
Download Founders Agreement Format for your Company
Download
FAQs
Is there a need to register Founders Agreement?
As such, there is no need to register the Founder’s Agreement. Making the agreement on stamp paper of non-judicial value is sufficient.
What is the need to make a founder’s agreement?
The founder’s agreement restricts co-founders from engaging with other employment opportunities, even if ousted from the company. This way the confidentiality and the operations of the business remain intact.
Is there any penalty for breaching the founder’s agreement?
Yes, but it depends on the severity of the dispute. For example, the shares of the co-founder will be vested with the company if he violates or breaches the agreement.
Hi @Aditya_s,
Company formation documents are the key pieces of documentation issued after the successful registration of a new limited company. You must retain these important documents, ideally at your registered office address, because you will need to refer to them throughout the lifetime of your company.