Founders Agreement

So you have your idea, hopefully you already talked to your potential buyers (I’ve written about importance of it here) and decided to go ahead, great!

Now it is time to draft an agreement between founders to establish basic rules for the future. Depending on the country you are in, you might decide to incorporate those into company agreement or sign a separate agreement among founders, there is no good solution to that decision, but the most important thing is to address it somewhere.

There are quite a few articles online on founders’ agreement and you might do it yourself but I strongly suggest you find a lawyer to help you with that. Sure, it is an additional cost and most probably you are short on capital in the beginning, but you do not have to go to fancy office that will rip you off, I am sure you can easily find a lawyer in your local startup community who can help you with the legal paperwork for fraction of remuneration fancy office would expect.

For us the crucial factor while selecting the lawyer was that he really understands what we are trying to build, that we want to go global, and that we want to incorporate best international practices (e.g. vesting) into our agreement, even though it was not easy at all in Poland (btw. If you are a Polish startup do not hesitate to contact us if you are interested how exactly we did it in the Polish law).

Below the list of main issues, you should incorporate in your agreement. Please bear in mind that it is not a complete list, those are just the must-haves. Regardless of how good you know your founders, even if you are friends for the last 20 years, just incorporate those if not for the sake of your future then for the sake of your friendship, you can never know how things will turn out in the future, it is better to be on the safe side, just in case.

Equity ownership

This might be a delicate discussion since most people do not feel comfortable talking about money and shares openly, so it is better to have it as soon as possible. It would be complete a waste of your time, if you do not agree on how you are going to share equity of your brand-new company amongst founders once substantial work has been done. That is why it is best if you can decide on it from the very beginning. Allocation of the ownership of the enterprise is a completely subjective matter, and depends greatly on who brings what to the table. Depending on legal possibilities in your country you might allocate 100% of equity between founders, or you might leave some of it (typically 10%) as on option pool for future hires.

Vesting

According to Investopedia ”Vesting gives an employee rights to employer-provided assets over time, which gives the employee an incentive to perform well and remain with the company.” Most definitely you will be introduced to it while working on agreement with your first investors, no one said though that you can’t incorporate vesting into founders’ agreement.

I think it is important that you do, simply because it is all very exciting in the beginning but you can’t tell how your founders will act in the future when you hit your first bumps, or you will be making yet another pivot. Having everyone’s shares vested over some period (typically 4 years) will guarantee that once any founder will drop out at any point, they will be proportionally rewarded, and you will avoid a very frustrating situation of someone having the same amount of shares as you do, not actively working for the company any more.

Roles and Responsibilities

Don’t get lured into an idea that your team is special and you will be making every decision collectively. Although it might work like that for some time, and sure, open discussions are very important, it simply won’t be possible in the long run. To avoid prolonging decision making in the future you should divide clear roles and responsibilities from day one just to move faster later one. Of course, it is not worth introducing corporate decision making process, simple division of areas where someone can single-handedly decide will be enough in most cases.

IP

Your goal is to create something that will be valuable to someone out there, regardless if your plan is to bootstrap or get an investor you are working collectively to make a product. Since the roles amongst your co-founders might differ your input will be also different, nevertheless everybody’s work creates your company IP. Whatever you are working on just make sure everything you guys create along the way will belong to the company, forever. Last thing you want is to realize that the crucial part of your product does not belong to the company day before meeting with your future investors. Plan for the best, but prepare for the worst.


Originally published at inhire.io on March 16, 2017.