How to use a Founders Agreement at your startup

By Vivian Michael | Startup

Your founders agreement describes how you and other founders will work together to launch and grow your startup.

So what's the benefit of a founder's agreement ?

For one, you can set clear expectations and minimise disputes. We'll go through some other's too. 

Why should I choose a founders agreement over an employment agreement ?

Firstly, unlike an employment agreement, all co-founder’s at your startup sign your founders agreement.

Also, you and your co-founders are bound by the same terms.

Your startup may use a founder’s agreement instead of drafting individual employment agreements.

Why ? because it cuts out the cost of multiple employment agreements.

Your co-founder's roles will change as you test and and tweak your offerings for your customers.

So, what information should I include about roles ?

You will need a general idea of each founder’s functions.

Further, you will need flexibility so that your founder's agreement can allow for changes to founder roles based on business needs.

So how should your founder's agreement be structured ?

General duties and responsibilities are outlined in the body of your agreement while your role descriptions are usually at the end.

Keep in mind that you will also need to customise your founders agreement for your startup.

Tip - an experienced lawyer for startups can help you. 

In addition, we have some inspiration for helpful clauses in your founder's agreement. 

1. Duties and responsibilities

Your startup's duties and responsibilities may involve: 

  • to carry out duties with reasonable care and skill; and 
  • to comply with laws; and 
  • to comply with management's direction. 

2. Decision making

So what's a significant decision ? 

You can agree on what's significant in your founders agreement.​

Perhaps seeking funding of $1,000,000 or making decisions about logo colours might be significant for you.

Decision making clauses will outline who will make your startup’s significant decisions and the consultation steps.

3. Resource contributions

Personal savings, business loans or investor capital are all potential sources for resource contributions.

Funding will be a major decision for your startup and because of that, it’s wise to include this clause.

You may wish to provide that each co-founder is repaid their contribution with interest where one co-founder has made a more substantial contribution than other co-founders.

Also, you may decide to repay any loans for your startup before any other profit allocations are made.

4. Conflict of interest

A conflict of interest may exist where a co-founder's and your startup’s aims are incompatible.

You may agree that another income source or project is perfectly acceptable.

In this case, you should have a clause that deals with conflicts of interest, before any arise.

Your conflict of interest clause can be drafted to require each founder to disclose any potential or existing conflict of interest. 

5. Restraints

You can include a restraint clause to prevent each of your co-founders from working with or for a competitor either before or after their term.

Employment restraints will typically be anywhere from 3 months to two years.

Also, restraints should only protect the legitimate interests of your startup. 

6. Confidentiality

Confidentiality clauses will stop co-founder’s from disclosing confidential information about your startup during and after their term. 

7. Intellectual property

Intellectual property normally states that intellectual property are the property of your startup.

Logo’s, trademarks, designs, business plans and source code are all intellectual property.

An intellectual property clause protects your startup should any co-founder leave and wish to make a claim. 

8. Mediation

Mediation clauses help you to minimise the escalation of disputes to legal proceedings.

Parties usually share mediation costs equally and there is an agreed procedure for choosing a mediator.

9. Variation

Variation clauses allow flexibility to change the terms of the agreement including the position descriptions.

10. Termination

Termination clauses practically set out what happens when the agreement ends.

For example, for each co-founder to hand back property and confidential information. 

Conclusion

It's important to have a clear idea of what matters most to you and your co-founders and include this in your founder's agreement.

Tailored employment agreements can take the place of the founders agreement as your startup grows and you have more cash flow.

 

 

 

About the Author

In October 2014 I founded Michael Law Group to make legal services accessible to startups that would otherwise DIY, rely on legacy contracts or go without.

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