Founders’ Agreement Or Co-Founder Agreement

Have you ever longed to stop being a part of the rat race and be your own boss? Ever wanted your name to go down in the history of entrepreneurial successes? Then, now is the time for budding entrepreneurs like you to spread your wings and see your dreams turning into reality. We all know that with the burgeoning of startups, India is going to get a much needed economic impetus. Startups can possibly be our answer to the impediment of unemployment.

Are you delighted at the prospects of starting a new company and are eagerly waiting for magic to unfold, even though you are well aware that starting a business is a tall and nerving task. Now, to add to your worries, you have to prepare well in advance to beat the legal hurdles that would ensue.

Well, there are a list of legal documents that every startup needs to have since its very inception, to prevent from being dragged to Courts and be privy to long drawn litigation. Nonetheless, one document that is of prime importance for all startups is the indispensable Founders’ Agreement.

What Is A Founders’ Agreement?

Founders’ Agreement is also known as a Co-founder agreement. People are so busy starting or establishing their businesses that they forget important aspects like making a founders’ agreement. As the name suggests, it is an agreement entered into between the founders of a company with respect to the ownership stake, equity, vesting schedules, roles and responsibilities that each and everyone of them need to abide by. Like most legal documents, this too binds the parties to the agreement and safeguards their interests in case there arises any dispute. To be confident of the future of your newly set establishment, it is imperative that you clearly lay out the ownership stake, IP assignment ownership, vesting rights, et al.

There are scores of ready-made Founders’ Agreement templates available online. And there are many who make use of these templates and later find themselves embroiled in legal fiascos. It is pertinent to understand that each establishment or enterprise has its own reach or limitations and one set template for all doesn’t solve any purpose whatsoever.

What Should Be Included In A Founders’ Agreement?

• Project Description – Here, you need to describe the business concept in clear and lucid terms. The purpose behind setting up of the company also has to be described in an unambiguous manner to a large extent. Please ensure that the description covers a wider ambit without being restrictive. It should also be specific and not vague.

• Investments or Capital Contribution – You should clearly lay down as to who will contribute what percentage of capital. The agreement should also mention individual ownership stake of each founder in the company. And if there happens to be a contribution of any tangible asset, even that needs to be clearly enumerated. This makes it easier to ascertain as to who invested what before and after inception of the business. The capital contribution made by each founder needs to be clearly documented, questions such as would additional contributions be demanded, can contributions be made after inception of the company also need to be addressed effectively.

• Roles and Responsibilities – This remains a very important clause, as it clearly specifies what each founder’s responsibility towards the company would be? Don’t stay away from discussing and deliberating on this point as dividing responsibilities can result in heated arguments. Hence, it is advisable that you discuss individual roles and responsibilities well in advance before you set out to start a business. Each founder has the responsibility of being truthful and faithful to the other founders, agree to keep all confidential information safe and not disclose it to any third party.

• Liabilities of the Founders – This clause mentions that founders shall be severally liable for acts that amount to fraud, wilful negligence or doing or abetting any illegal acts. Any founder shall not be held liable for any wrongful act on the part of the other founder. This clause also states that, if any loss is caused by a founder intentionally, then he is entitled to indemnify the loss caused to the company.

• Intellectual Property – This clause addresses questions like, will the creation or invention by any Founder for the company be deemed as a creation of the others as well? What would happen to the inventions made by the employee/s of the company? Would the employee/s continue to enjoy his own intellectual property or would that be the property of the company and thereby of the founders too?

• Vesting Schedule – This is a very important clause in any Founders’ agreement. This clause suggests that, if any of the founders leaves the company in the initial stages, it might pose a difficulty for the other founders. A vesting schedule is more of a defence mechanism wherein a founder will only be given a percentage of his shares and that too, after the passage of some time while working for the company. This encourages the founder to stay back, so that he is able to obtain all his remaining shares in the company.

• Amendment/Waiver – This clause states that the founders’ agreement shall not be amended or altered except if there is an agreement in writing duly signed by the founders to this effect. The said clause also makes it clear that none of the provisions of the agreement shall be waived except with the written consent of the Founder waiving off the compliance of such provision.

• Disputes Resolution Mechanism – By way of this clause, it is clearly specified as to what would happen in the event of a dispute between the founders, what would the governing law be, where shall all claims and proceedings arising under the agreement be brought, and which Court would have the jurisdiction to adjudicate this matter.

• Voting – This clause makes it clear that, if there ever arises a dispute relating to the business, then the decisions shall be taken by way of a majority vote and the founder’s individual ownership share will determine their voting powers.

How LegalDesk Helps Startups?

The great German theologian Meister Eckhart had once said “And suddenly you know: it is time to start something new and trust the magic of beginnings”. So take heed of the master’s words and go ahead and live your dream of starting a company and let the magic begin, while we take care of your legal worries. Drop all those templates available online that are likely to land you in the soup and choose our drafted customisable Founders’ Agreement. You can also choose from our wide range of startup related legal documents.