Founder’s Agreement | Why is it important for StartUps

When two or more co-founders start a company it is a little bit like getting married. Each person observes a quality in the other and believes there is potential for a mutually beneficial and long-term relationship. Both are serious commitments not to be entered into casually and come with several key issues that should be discussed early on.

A founders’ agreement is generally not legally binding. But it does provide some protection to founders who later find themselves working with an attorney as they sort out their business separation. The agreement is therefore, a documentation that you were once on the same page as your cofounder.

What actually is a Founders’ Agreement?

A founders’ agreement is a term used for agreements between the co-founders of a company that address the relationships between the co-founders and provide further with their rights and responsibilities in the company. This agreement is a contract between you and your co-founders. In this contract are a number of promises. By signing the contract, both sides agree to keep those promises, and to accept the consequences if they don’t.

When is the ‘right time’ for entering into a Founders’ Agreement?

There can be no perfect timing but one can say the sooner the better, but late is better than never. A good rule of thumb for when to think about a founders’ agreement is that point at which you start thinking about a company instead of merely an idea. If you have passed that point and have not yet created a founders’ agreement, better late than never.

The Essentials to be mentioned in the Agreement (What one cannot afford to exclude from the Agreement)

  1. The Names of Co-founders as well as of their Venture
  2. Founders’ equity (or shares)
  3. Squad Goals
  4. Decision making powers
  5. Future plans of founders that are not aligned with the company
  6. Roles and Responsibilities, future and immediate goals (milestones)
  7. Termination Clauses

About the Author

This article has been written by our Guest author — Rudraksh Durrani. Rudraksh is a 3rd law student at Rajiv Gandhi National University of Law, Punjab.

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