First of all it will be defined as an agreement amongst the founders of the company which governs the nature and functioning of their business and also highlight the key issues that co founders might face in future in running a business. It’s just like insurance which guard the founders in future uncertainties. Therefore, it is advisable to execute it at an early stage of incorporation of Company.
A Founders’ Agreement is an official contract that is signed between all the co-founders of a firm. This document states all the responsibilities, ownership, and initial investments made by each of the founders of the company.
BENEFITS FOR ENTERING INTO FOUNDERS AGREEMENT
- It helps in formalizing the relationship between two or more people who intend to start a business venture.
- Entering into the founders agreement guards the founders from future disputes and uncertainties
CLAUSES OF FOUNDERS AGREEMENT
Some of the key points that the well-structured founders’ agreement must set out clearly:
- Overall goal and vision for the business
The main purpose for which the business is brought into existence by the co- founders should be clearly mentioned. Therefore, it is imperative to define the goals and vision before taking any actions so that all the co-founders are on the same line with the purpose of formation of business.
- Percentage of shares in the Company:
Founders’ agreement must clearly mention the share percentage founders have made to the company
- Vesting of shares:
Another point that should be made clear in the agreement is whether the percentage ownership is subject to vesting because in most cases, the founders’ investment does not take the form of money rather than their contribution to the business.
Vesting means founders earn their equity ownership by contributing to the company with their valuable work and efforts for the company
- Roles and responsibilities of founders :
The purpose of the formation of business can never be fulfilled if the founders are not aware of their roles and work responsibilities therefore, founder’s agreement must clearly define the roles of each co-founder to avoid any hassle.
Founders’ agreement must clearly mention what salary the founders will be withdrawing from the company in order to avoid the future conflicts
- Decision making powers
In order to avoid a conflicts it has been suggested that the co-founder’s agreement should provide that how the decisions related to control, management of day to day activities, constitution of Board who are going to take major decisions
- Termination of co – founder
Clauses for the termination of co- founder or his removal in certain situations should be covered up along with the reasons including termination due to death or illness.
- Dissolution of Company
Clause with respect to the situation under which the company gets wind up should be incorporated in the agreement. It should also include the manner of distribution of money and other resources to the founders in event of liquidation.
- Dispute Resolution
A mechanism for resolution of the unavoidable disputes between the co founders should be provided in the agreement. There is always a possibility of conflict arising between the founders. In such a situation, it is imperative to provide for the dispute resolution mechanism either through Arbitration or mediation.