Founders' Agreement

A founders' agreement is a binding contract between the individuals who start a company. It outlines the terms and conditions of their partnership, essentially serving as a blueprint for how the business will be run and how decisions will be made.

It's particularly important when there are multiple co-founders, as it addresses aspects like ownership, responsibilities, and even exit strategies. Think of it as a prenuptial agreement for your business, designed to protect everyone's interests.

By articulating key aspects like equity distribution, decision-making processes, and dispute resolution, this agreement minimizes misunderstandings and provides a framework for collaboration.

Let's explore why this document is so critical for your startup's success.

Why is the Founders' Agreement Important?

A founders' agreement is vital for several reasons:

• Clarity and Expectations: It clearly defines each founder's role, responsibilities, and expected contributions, preventing misunderstandings later on.
• Equity Distribution: It precisely outlines how equity (ownership shares) will be divided among founders, including vesting schedules and clauses for departures. This is crucial for a co-founder equity agreement or a founder's equity agreement.
• Decision-Making: It establishes a clear process for making important business decisions, whether by consensus, majority vote, or specific assigned authority.
• Dispute Resolution: It provides a mechanism for resolving disagreements or conflicts among founders, avoiding costly and time-consuming litigation.
• Protecting Intellectual Property: It often includes provisions for assigning intellectual property created by founders to the company.
• Exit Strategy: It addresses what happens if a founder leaves the company, covering buyback clauses, non-compete agreements, and transfer restrictions.
• Attracting Investors: Investors often look for a solid founders agreement as it demonstrates a well-thought-out and stable founding team.

When is the Founders' Agreement Required?

A founders' agreement is required and highly recommended at the very beginning of a startup's journey, ideally before or shortly after the formal incorporation of the company.

Even if you are just starting with an idea, having an agreement between co-founders is beneficial. It's particularly crucial in the following situations:

• Before Formalizing Partnership: As soon as you decide to form a business with one or more co-founders.
• Before Seeking Investment: Investors will typically ask to see this agreement to understand the stability and structure of the founding team.
• Before Developing Products/Services: Ensure that all intellectual property created by founders belongs to the company.
• When there's a significant commitment of time or resources: To protect the interests of all involved.
• Even after incorporation: A founder's agreement after incorporation can still be drafted, though it's best to do it as early as possible to prevent potential issues.

A comprehensive founders' agreement template typically includes the following key components:

Any individual or group of individuals who are starting a new business venture with co-founders should create a founders' agreement. This includes:

• Entrepreneurs launching a startup.
• Business partners are forming a new company.
• Innovators are collaborating on a new product or service.
• Friends or colleagues venturing into business together.

While the primary "document" is the agreement itself, having the following information and informal documents ready can streamline the drafting process:

• Founder Identities: Full legal names, addresses, and contact information for all founders.
• Business Idea/Plan: A clear understanding of the business concept, mission, and vision.
• Proposed Equity Split: The initial discussion or agreed-upon percentages of ownership for each founder.
• Roles & Responsibilities Outline: A preliminary list of what each founder will be responsible for.
• Company Name & Structure: If already decided (e.g., Private Limited Company, LLP).
• Intellectual Property Details: Any existing IP/trademark or plans for IP development.
• Initial Contributions: Details of capital, assets, or time contributed by each founder.

While both are crucial for a company, there are key distinctions:

The procedure for drafting a founders' agreement typically involves these steps:

Step 1: Initial Discussion among Founders: All co-founders sit down to discuss and agree upon their shared vision, individual roles, specific responsibilities, equity distribution, and anticipated challenges for the new venture.

Step 2: Information Gathering: Collect all necessary details about each founder (full legal names, addresses, contact information) and the business (business concept, proposed equity split, initial contributions, and, if decided, the company name and structure).

Step 3: Legal Consultation: Engage a legal professional specializing in startup law. They will provide expert advice, ensuring the agreement is legally sound, comprehensive, and enforceable under relevant laws.

Step 4: Drafting the Agreement: The lawyer will draft the Founders’ Agreement based on the discussions and information provided. This draft will include essential clauses such as equity vesting, intellectual property assignment, and dispute resolution mechanisms.

Step 5: Review and Negotiation: All founders meticulously review the drafted agreement. This is a crucial stage for discussing, negotiating, and clarifying any terms to ensure complete comfort and understanding among all parties.

Step 6: Revisions: Based on the feedback and negotiated points from the founders, the legal professional will make the necessary revisions to the draft document.

Step 7: Signing the Agreement: Once all founders mutually agree to the finalized terms, they formally sign the document. This is often done in the presence of witnesses or a notary to ensure legal validity.

The cost of drafting a founders' agreement in India can vary significantly based on several factors:

Note: Prices vary based on the complexity of the agreement, location, and the consultant or law firm you engage. Contact a professional and get help with your finances.

Terminating a founders' agreement means formally ending the legal contract that governs the relationship among the founders. This can happen under various circumstances as outlined in the agreement itself.

Common reasons for termination include:

• Mutual Consent: This is the most straightforward ground for termination. If all founders agree that the agreement is no longer necessary or beneficial, they can mutually decide to end it. This often involves a written agreement outlining the terms of termination, including asset distribution, intellectual property rights, and any ongoing responsibilities.
• Breach of Contract: If one or more founders fail to uphold their obligations as defined in the agreement, it can constitute a breach of contract. This might include issues like not contributing agreed-upon capital, failing to perform assigned duties, violating confidentiality clauses, or engaging in activities detrimental to the company. The agreement usually outlines what constitutes a material breach and the process for addressing it, which may lead to termination if the breach isn't rectified.
• Achievement of Purpose: Some founder agreements are created for a specific project or a defined period. Once the project is completed or the specified timeframe expires, the agreement's purpose has been fulfilled, leading to its natural termination.
• Company Dissolution: If the startup or company itself is dissolved or goes out of business, the founder agreement typically terminates along with it. The agreement should ideally include provisions for how assets and liabilities are handled in such a scenario.
• Exit of a Founder: While not always a full termination of the entire agreement, the departure of a founder (whether voluntary or involuntary) often triggers specific clauses within the agreement that effectively terminate that individual's involvement. This may lead to a revised agreement among the remaining founders or a partial termination for the existing founder, outlining their equity buyback, non-compete clauses, and other post-departure terms.
• Material Change in Circumstances: In some cases, unforeseen and significant changes that fundamentally alter the basis of the agreement (e.g., a major shift in market conditions making the original business model unviable) might be grounds for re-negotiation or termination, though this is often more complex and may require legal counsel.

Alternative Options to the Founders’ Agreement Termination

Terminating a founder agreement can be a drastic step, and often, there are less disruptive alternatives that can address issues while preserving the core relationship or business. Exploring these options can save time, resources, and potential legal disputes.

• Re-negotiation and Amendment: Instead of outright termination, founders can opt to re-negotiate specific terms or amend the existing agreement. This is particularly useful when circumstances change or initial assumptions prove incorrect. It allows for flexibility and adaptation without completely dissolving the foundational document. For example, if a founder's role changes, their equity vesting schedule or responsibilities can be amended.
• Mediation or Arbitration: When disagreements arise that threaten the agreement, but direct negotiation is difficult, mediation or arbitration can provide a neutral third party to help resolve disputes. Mediation is non-binding, while arbitration typically results in a binding decision, offering a structured way to find common ground without resorting to full termination or litigation.
• Founder Buyout: If one founder wishes to leave or is no longer contributing effectively, a buyout option can be pursued. The remaining founders of the company itself can purchase the departing founder's equity, allowing them to exit gracefully while the agreement continues for the others. The founder agreement should ideally outline the valuation method for such buyouts.
• Role Reassignment or Restructuring: Sometimes, issues stem from a mismatch between a founder's skills and their assigned role, or a change in the company's needs. Instead of termination, founders can consider reassigning roles, restructuring responsibilities, or even bringing in external expertise to fill gaps, allowing the agreement to continue with adjusted parameters.
• Temporary Suspension: In rare cases, if the issues are temporary or require a pause for re-evaluation, founders might agree to temporarily suspend certain clauses or the agreement as a whole, with clear conditions for its reactivation. This is less common but can be useful in highly specific, short-term scenarios.

This Founders' Agreement ("Agreement") is entered into on [Date], by and among the following individuals (each a “Founder” and collectively the “Founders”):

• Founder 1 Name
  Address: [Founder 1 Address]
  Email: [Founder 1 Email]
• Founder 2 Name
  Address: [Founder 2 Address]
  Email: [Founder 2 Email]

(Add additional Founders if applicable)

RECITALS

WHEREAS, the Founders intend to establish a company provisionally named [Provisional Company Name] ("Company") to engage in the business of [Business Description];

WHEREAS, the Founders wish to set forth their understanding regarding their respective roles, responsibilities, equity ownership, and rights regarding the Company;

NOW, THEREFORE, in consideration of the foregoing and the mutual promises set forth below, the Founders agree as follows:

ARTICLE 1: COMPANY FORMATION

1.1. Name: The Company shall be named [Final Company Name].
1.2. Legal Structure: The Company shall be incorporated as a [e.g., Private Limited Company] under the laws of [Jurisdiction].
1.3. Incorporation Date: The target incorporation date is [Date].

ARTICLE 2: CAPITAL AND EQUITY

2.1. Equity Split: The initial ownership shall be as follows:

2.2. Capital Contributions:
Each Founder agrees to contribute the following:

• Founder 1 Name
  • Cash: [Amount]
  • In-kind: [Services, IP, assets]
• Founder 2 Name
  • Cash: [Amount]
  • In-kind: [Services, IP, assets]

2.3. Vesting (Optional but Recommended):

• Vesting period: [e.g., 4 years]
• Cliff: [e.g., 12 months]
• Vesting frequency: [e.g., monthly]
• Acceleration: [e.g., Double-trigger upon Change of Control]

ARTICLE 3: ROLES & RESPONSIBILITIES

3.1. Initial Roles:

• Founder 1 Name: [Title, e.g., CEO]
  Responsibilities: [Key areas]
• Founder 2 Name: [Title, e.g., CTO]
  Responsibilities: [Key areas]

3.2. Time Commitment: All Founders shall dedicate [full-time/part-time] effort. Any material outside commitment must be disclosed.

3.3. Decision-Making:

• Day-to-day: [e.g., consensus or CEO discretion]
• Major decisions (e.g., equity, debt, IP transfer): Require [majority/unanimous] consent.

ARTICLE 4: INTELLECTUAL PROPERTY

4.1. IP Assignment: All IP developed by Founders for the Company shall be owned by the Company.
4.2. Prior IP: Any existing IP retained by a Founder must be disclosed and listed in Schedule A.
4.3. Confidentiality: Founders shall maintain strict confidentiality during and after their time with the Company.

ARTICLE 5: COMPENSATION

5.1. Salaries: Initial compensation shall be [e.g., deferred, fixed at INR 25,000/month starting MM/YYYY].
5.2. Reimbursements: Reasonable business expenses shall be reimbursed with appropriate documentation.

ARTICLE 6: FOUNDER DEPARTURE

6.1. Voluntary Exit: Unvested equity is forfeited. Vested equity may be repurchased at [e.g., fair market value].
6.2. Termination for Cause: All equity (vested and unvested) may be forfeited.
6.3. Without Cause: Unvested equity forfeited; vested equity may be repurchased.
6.4. Death/Disability: [e.g., Partial or full vesting, equity repurchase terms]
6.5. Repurchase Option: The Company may repurchase equity within [e.g., 60 days] after exit.

ARTICLE 7: TRANSFER RESTRICTIONS

7.1. Right of First Refusal: Founders must offer shares to the Company before transferring to third parties.
7.2. Tag-Along Rights: Remaining Founders can join any third-party sale proportionally.
7.3. Drag-Along Rights: If Founders holding [e.g., 75%] of equity approve a sale, others must sell on the same terms.

ARTICLE 8: NON-COMPETE & NON-SOLICITATION

8.1. Non-Compete: Founders agree not to start or join a competing business for [X months/years] post-departure within [Geographic Area].
8.2. Non-Solicit: Founders agree not to solicit Company employees or clients for [X months/years] after leaving.

ARTICLE 9: DISPUTE RESOLUTION

9.1. Negotiation: Good faith efforts will be made to resolve any disputes.
9.2. Mediation: Disputes not resolved may go to mediation in [City].
9.3. Arbitration: Failing mediation, binding arbitration under [Rules], held in [City, State, Country].
9.4. Governing Law: This Agreement shall be governed by the laws of [Jurisdiction].

ARTICLE 10: MISCELLANEOUS

10.1. Entire Agreement: This document is the complete agreement among the Founders.
10.2. Amendments: Any changes must be in writing and signed by all Founders.
10.3. Severability: If any provision is invalid, the rest remains enforceable.
10.4. Notices: Notices shall be sent to the addresses listed above.
10.5. Counterparts: Agreement may be signed in counterparts.
10.6. Successors & Assigns: This Agreement binds successors and assigns of the Founders.

IN WITNESS WHEREOF, the Founders have executed this Agreement as of the date first above written.

Founder Signatures:

Founder 1 Name

Founder 2 Name

(Add more lines as needed)

SCHEDULE A: Prior Intellectual Property

[List any pre-existing IP each Founder brings to the company. If none, state “None.”].