A Founders Agreement is an official contract or a legal agreement executed between the co-founders of the company while setting up a business. This agreement explains the roles, rights, duties, responsibilities, ownership, liabilities, and investment proportion of each founder.
A Founders Agreement should be in written format, not oral.
Two or more partners can jointly enter into the Founders Agreement, called co-partners/parties.
All co-founders will enter into the agreement exactly at the time of incorporating the business or company.
The main objective of the Founders Agreement is to avoid disputes regarding business, which may arise over time between co-founders. This agreement clearly sets out the strategy of the founders, who should act within the defined boundaries and follow the mandatory provisions laid down.
The Founders Agreement also helps in handling uncertain situations such as the death or resignation of a co-founder, which may directly impact the sustained growth and smooth running of the business or firm.
Advantages of a Founders Agreement
Determining the Type of Business Entity: The agreement clearly defines the nature and type of entity to be established, setting the right foundation for the business.
Outlined Business Plans: It outlines the company’s vision, mission, and both short-term and long-term goals.
Role and Responsibility Allocation: To avoid overlapping functions, this agreement specifies each co-founder's roles and duties based on their expertise such as marketing, operations, or finance.
Ownership Structure: It specifies ownership distribution based on initial capital contributions or equity percentage, preventing future disputes.
Decision-Making Process: The agreement sets out procedures for resolving conflicts, including voting rights, vote value, and solutions for deadlocks.
Compensation Provisions: If a co-founder breaches terms, the agreement mentions the compensation scheme and proportion for each party.
Expulsion of Co-founders: It provides a framework for removing co-founders involved in misconduct like fund misuse or policy violations and specifies fund settlement procedures.
Confidentiality Clause: A separate clause ensures co-founders maintain secrecy regarding business information.
Documents Required for Drafting a Founders Agreement
Address proof of all co-founders
Identity proof of all co-founders
Identity proof of witnesses
Clear statement of the company's objective
Details of equity shares held by each co-founder
Overall shareholding percentage of each co-founder
Procedure for Drafting a Founders Agreement
Draft the Founders Agreement including key elements such as the company’s objectives, terms, and responsibilities of each co-founder.
Review the draft to ensure all mandatory provisions are covered and remove any ambiguous terms.
Incorporate any additional necessary details based on mutual consent.
Share the final draft with all co-founders for review and approval.
Notarize the agreement on a non-judicial stamp paper.
Obtain the signatures of all co-founders on the final document.
Seek professional legal advice to prevent future disputes.
Key Terms of a Founders Agreement
Founders: Identifies all co-founders along with their roles and responsibilities.
Ownership: Specifies the equity distribution and percentage of ownership held by each co-founder.
Vesting: Details the vesting schedule for equity ownership, usually spread over four years with a one-year cliff to ensure commitment.
Management and Control: Outlines the decision-making process, authority, and responsibilities assigned to each co-founder.
Intellectual Property: Covers the ownership and protection of company IP such as patents, trademarks, and trade secrets.
Confidentiality & Non-Disclosure: Binds founders to maintain the confidentiality of proprietary business information.
Termination & Exit: Defines conditions for a co-founder’s exit, termination process, right of first refusal, and buyout clauses.
Dispute Resolution: Sets procedures for resolving conflicts, including mediation or arbitration methods.
Founders Agreement Template
THIS FOUNDERS' AGREEMENT (the "Agreement") is made on [DD/MM/YYYY] between [Company Name] (the "Company") and the following Founders (the "Founders"):
[Founder 1 Name]
[Founder 2 Name]
I. Business Venture: The Founders have formed [Company Name], with its registered office at [Business Address].
II. Initial Capital: Each Founder will contribute ₹₹₹ as non-refundable initial capital. Additional contributions require unanimous written consent.
III. Ownership Structure: Ownership is allocated as follows: [Specify share distribution]. These shares reflect initial ownership and are non-transferable.
IV. Voting Rights: Voting rights correspond to ownership percentages. In case of a tie, [Insert Name] will cast the deciding vote.
V. Vesting Schedule: Shares may vest over a schedule agreed later. Unvested shares will revert to the Company if a Founder leaves before full vesting.
VI. Intellectual Property: All IP created by Founders for the business shall belong to the Company. Founders must take necessary steps to assign rights to the Company.
VII. Amendments & Termination: Any change requires a written agreement signed by all Founders. Oral modifications are not valid.
VIII. Resignation & Removal: A Founder may resign with written notice. Any positive capital balance will be settled within 180 days. Removal requires a majority vote as per voting rules.
IX. Miscellaneous Provisions:
A. Confidentiality: All confidential business information must be kept secret unless disclosure is unanimously approved.
B. Dispute Resolution: Disputes will be resolved via mediation or arbitration under the American Arbitration Association (or similar agency).
C. Severability: If any clause is invalid, the rest of the Agreement remains in effect.
D. Entire Agreement: This Agreement represents the complete understanding between the Founders, superseding all prior discussions.
IN WITNESS WHEREOF, the Founders have executed this Agreement: