Home Tax & Compliance Founders Agreement Drafting

Founders Agreement Drafting

The Founders Agreement is a contract which is officially formed between the founders who have co- founded a business entity. It majorly states the following: 1. Responsibilities held by the founders 2. The nature of ownership held by them 3. Initial amount of Capital Investment made by each of them

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Overview of Founders Agreement

In a common instance, the Founders Agreement will be formed at the initial stage of formation and incorporation of the entity so as to bring clarity with regard to the roles and responsibilities played and held by each of them. This will help to keep any ambiguity regarding the responsibility and role of founders at bay.

Content of Founders Agreement

Definition of the business formed.
Particulars of capital investment made by founders
Details of the ownership
Roles and responsibilities held by each co-founder in the entity
Compensation or remuneration fixed for each co-founder
Particulars regarding the formalities for exiting from the entity
Dissolution formality for entity
Particulars about formalities for resolution of dispute
Other provisions (Miscellaneous).

Terms of Service

Like any other official contract, it is always recommended to write the same instead of forming any oral contract. It should be written down or drafted with the help of an expert team so that there are no loopholes left in the contract, which can later be used for exploiting the other founders. In short, it should ensure justice and equity to all the founders who have come together putting both money and time along with effort in establishing and developing a business.

Advantages of Founders Agreement

The type of business entity can be determined from the founder’s agreement and it gives good clarity on the same.
The founders and the allied stakeholders can derive the vision and mission of the business as the founder’s agreement states the detailed business plan of the founders for the business.
It will help the founders lay down the role clarity and responsibilities that are assigned to each founder.
The structure of the ownership based on the investment made by each founder and the share of equity shares or the total shareholding held by each of them. This will help in keeping at bay any future dispute or conflict which might arise between them.
The founder’s agreement provides a base for settling and solving any dispute or conflict that arises between the founders. This is because it is the founder’s agreement that will act as
The base helps in the decision-making process by formulating the procedure for solving the same.
It clearly states that compensation or remuneration is to be paid to the founders in case of any violation of the rules laid down or other problems arise.
The expulsion of any founders due to involving themselves in any fraudulent activities or misappropriation of funds or such other activities affecting the credibility areputation of the company can be regulated using the Founders Agreement as it holds the detailed procedur for the same.
The founders can keep all their decisions confidential using this agreement.

Procedure for Drafting the Founders Agreement

There are certain steps which should be followed by the co-founders of and newly starting establishment for getting their Founders Agreement ready. And this has been explained below:

Step 1: Draft a Founder Agreement detailing all the required fields which were stipulated before including the terms, objectives, investment, dispute resolution procedure and all other relevant points which should be followed and complied with by the co-founders without failure.
Step 2: Verify or check the drafted agreement to ensure that there are no loopholes or missing out of important provisions committed, along with adding of any unnecessary clauses or details.
Step 3: Get the final draft of the Founders Agreement checked and confirmed by the co-founders and provide suggestions for any changes, additions or deletions to be made or stating the acceptance of the draft.
Step 4: On the acceptance of the agreement by the co-founders, the Founders Agreement should be Notarized by printing the same on a non-judicial stamp paper.
Step 5: Get this Notarized Agreement, signed by all the co-founders included in the entity making the same legal and binding on each one of them.

A Detail Checklist for Provisions to be Included

Provided below is the checkbox which should be used by the personnel while drafting a Founders Agreement:

1. Equity and Ownership

This is the first and foremost clause which would help the entity demarcate the equity ownership of the co-founders and the vesting of the same on them. The major base for determining the equity ownership would be the amount of investment made by each one of them. There can also be the other vesting methods used on the basis of decisions made by founders like the time-based vesting or the mile-stone based vesting.

2. Share Transfer

This clause should clearly state any restriction on the transfer of share providing the lock-in period within which the co-founder should not transfer his or her shares to any other person. And during this period if any founder leaves the company due to certain inevitable reasons, then the shares shall be reverted to the entity itself.

3. Intellectual Property Allotment

Any innovative ideas or such other intellectual property developed and utilized in the company shall now be the property of the company and there should not be space for any individual claim for this. This is an important clause as it would help the company ensure that the co-founders will not be making a claim of any ideas or innovations which were brought in by them and is used within the company.

4. Any Restraint to be laid down on Trade

This clause is important to ensure that the co-founders does not involve themselves in any activities or business which would form any type of contradiction with the objective of the entity which was co-founded by them. This shall also state that the founders even if they leave the company should not indulge in a trade which would become a direct competition to the entity.

5. Employment Terms

This clause should include any necessary terms, conditions, rules or regulations for regulating the employment of the co-founders in the entity. The nature of this employment, say part-time or full- time and such other details with respect to the compensation or remuneration which would be paid to them along with any perks or other benefits being paid.

6. Dispute Resolution

This clause should include the appropriate dispute resolution system or mechanism designed and implemented within the entity such that it is easy and well placed.

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