Founders Agreement or Employment Agreement?
Updated: 6 December 2019
If you are launching a startup with others, you might be deciding between a founders agreement or an employment agreement to clearly set out your roles and responsibilities.
So which one should you choose?
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When to use a founder’s agreement
The founder’s agreement works well if there are a few founders. Also, it can be cost effective to draft one agreement rather than multiple employment agreements.
And, if it's early days and you only have a rough idea of founder roles or work terms, then it may make sense to use the founder's agreement.
And to clarify, the founders are those original people involved in bringing the business idea to life. They may or may not be directors.
Founder agreement pros
These are the benefits of a founders agreement:
- Cost effective for multiple founders (pay for 1 agreement only); and
- Quick to prepare if there aren't many revisions - you are giving instructions to your lawyer for one agreement not multiple.
- Good when it's too early to pay a salary, you can negotiate the work expectations and add a clause to deal with pay either when there's profit, as the board determines or when financial contributions by founders have been repaid.
Founder agreement cons
Some reasons why the founders agreement may not be suitable:
- One size fits all may not work if there are different working conditions for each founder;
- Might take longer to negotiate with more founders giving input; and if it takes longer to prepare, it may cost more to draft.
When to use an employment agreement
You may wish to use an employment agreement if you have a clearer of idea each founder's role and you have been up and running for 1 year or longer and the founder's can pay themselves a salary.
You can set special conditions for a founder in their own tailored employment agreement; this is a particularly useful difference when compared to the one-size-fits-all approach of the founders agreement.
Employment agreement pros
Here are the benefits of the employment agreement:
- The employment agreement will allow you to customise worker benefits, entitlements and terms for each founder with more detail; and
- You may legitimately be adding employees going forward, not additional founders, so they should have employment agreements and not be added into the founder agreement.
Employment agreement cons
You'll need to make sure you know the minimum employee entitlements in Australia and if there is an applicable Award, that you are paying entitlements at this level or higher.
Conflict with shareholder agreement
You'll want to make sure that the founder's agreement does not conflict with other agreements.
For example, the company founders may also be shareholders of the same company.
In this case, if you have/are thinking about getting a shareholder agreement in place, here’s how to handle any conflict between the founder agreement and the shareholder agreement.
You can have a conflict clause in your founders agreement so your agreements don’t clash. Here’s a typical one for a founders agreement:
If there is a conflict between the founders agreement and the shareholder agreement, the provisions in the shareholder agreement will apply and the founders agreement will be revised to remove that conflict.
Terminating a founders agreement
You’ll need a termination clause in the founder’s agreement to cover for a few situations where founders may stop working together.
Or, you may want to terminate the founder's agreement to replace with an employment agreement for each founder.
To terminate the founder’s agreement, each founder can give written notice once the employment agreement is ready and they'll sign the employment agreement instead.
So below is what a termination clause in your founder's agreement could look like.
Sample termination clause
TERMINATION OF AGREEMENT
Both the Co-Founder and Company retain the right to terminate this agreement by providing 4 weeks written notice to each other.
As an exception to sub clause 1, the Company board may terminate this Agreement with any Co-Founder immediately and without notice where the Co-Founder:
(a) commits any serious or persistent breach of any of the provisions of this Agreement;
(b) is charged with any offence which in the reasonable opinion of the Company brings the Company into disrepute.
(c) is bankrupt or makes a composition or arrangement with their creditors or takes advantage of any statute for the relief of insolvent debtors;
(d) has a conflict of interest in terms of clause 9 and does not notify the Company as required by that clause;
(e) commits any other act or omission that would justify summary dismissal at common law; or
(f) fails to comply with the board’s lawful and reasonable direction.
Return of company property
On termination of this Agreement for any reason, the Co-Founder must immediately return to the Company all property of the Company.
Giving effect to termination
On termination of their engagement, the Co-Founder :
(i) will resign and sign any and all documentation to give effect to that resignation. If the Co-Founder fails to resign, the Company is irrevocably authorised to sign all documents and do all acts to give effect to the resignation;
(ii) must not make any written or oral representation that they are a current Co-Founder of the Company; and
(iii) must update all social media media, networking and other online accounts to remove their affiliation with the Company as a current Co-Founder.
Contents of founders agreement vs employment agreement
Below you'll get an idea of the key clauses in both the founders and employment agreement.
The list is not exhaustive. And, in some cases some extra clauses are added to factor for unique situations e.g. surveillance process for CCTV footage at work etc.
Finally, if you are issuing an employment agreement, don't forget to download and provide each founder with a fair work information statement - it's mandatory.
I wish you every success in your ventures!