Know About The Founders Agreement

LegalKart Editor
LegalKart Editor 06 min read 766 Views
Last Updated: Nov 08, 2023
Know About The Founders Agreement

Privatisation And Liberalisation Are The Needs Of An Inclusive, Democratic Set-up

In contemporary times, a liberal democratic national set-up allows for a substantially good level of privatisation and liberalisation, in line with its belief in diversity, plurality and 'let live'.  Many believe that only a society which accepts and acknowledges the importance of the private sector is an inclusive set-up, which alone can do maximum good to the maximum people. 

In A Libetral Society, Private Companies And Firms Are Owned By The Founders/Co-Founders 

Private companies in a liberal democratic set-up are owned by the founders and co-founders. In fact, founders and cofounders set up the company and (in most cases) are its owner for at least some point in time. Thus, founders are bound by some laws and legislation. Founders' agreement is one significant step in that direction. 

What Is The Founders' Agreement? 

The 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 elucidates the roles, rights and duties, responsibilities, ownership, liabilities, and investment proportion of each founder. 

A founders' agreement should be made in the written format, not by an oral.

Two or more partners jointly can enter into the founders' agreement called co-partners/ parties.

All co-founders will enter into the agreement exactly while incorporating the business or company.

The objective of the founders' agreement is to avoid disputes regarding business, which may arise over time between co-founders. This agreement apparently set out the strategy of the founders, who should act within the ambit and should follow the mandatory provisions laid on.

Founders' agreements also help in tackling uncertain occurrences like the death of the co-founder, resignation, which directly affects the sustained growth and smooth running of the business or firm.

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The Advantages Of A Founders Agreement

Finding out the type of business entity:

he founders' agreement will clearly mention the nature and type of entity that should be established by the co-founders thereby setting the proper path to be followed.

The outline of business plans:

This agreement describes the vision and mission of the entity and sets the short term and long term goals to be achieved over a period of time.

Determining the roles and responsibilities:

Obviously, there will be overlapping roles and functions between co-founders without having a proper framework of the assigned roles. Therefore, it is important to designate the roles and responsibilities of the co-founders, in accordance with their area of mastery like marketing, operations, finance, etc.

Ownership structure :

The founder's agreements will clearly specify the structure of ownership pertaining to the initial contribution made by the cofounder or the percentage of the equity shares held by the cofounder in case of a company, thereby avoiding any future conflicts in between them.

Decision making:

At a certain point in time, there will be an ideological conflict between co-founders, So these conflicts are to be handled through the proper decision-making process. Here the founders' agreement will formulate a procedure to be followed during the decision making process. If the voting system is adopted, then it should define the value of votes for each founder and provide a solution in case of a deadlock situation.

Provisions for compensation :

This agreement laid down the scheme of compensation to be carried out, if anyone of the cofounder has violated the provisions mandated. Here, the proportion of the compensation to be made will be mentioned for every cofounder.

Expulsion of co-founders:

Any co-founder can be evicted from the company for indulging in fraudulent activities like misappropriation of funds, sexual harassment, and getting employed with other organisations. This agreement ensures a proper structure on how to deal with these situations and sorting out appropriate funds to be reverted to the expelled co-founder.

Secrecy & Confidentiality:

There was a separate clause on confidentiality in the founders' agreement, which makes an obligation for founders to not reveal the secrets of the business.

Checklist: key provisions of the Founder’s Agreement

Equity ownership:

One of the most important provisions of a founder’s agreement is demarcating the equity ownership of each of the co-founder of the company. This equity ownership will be determined by considering the various factors like money invested, exposure, etc. This evaluates the jurisdiction of the voting rights of each co-founder.

Shares Vesting

If any one of the founders exits from the company, a proper pattern of vesting the shares should be ruled out in the agreement. The vesting of shares can be done in two ways, they are;

Time-based vesting: 

Under this method, the shares of founders will be vested in proportion to the span of years invested by them. If any of the founders have been relieved or ousted from the company before the expiry of his/her term, then the outstanding shares will revert to the company. Here, the performance of the founder will not be taken into consideration.

Milestone vesting: 

Under this method, the shares will be vested with respect to the milestone achieved by the company. If the founder exits the company before achieving this milestone, then the shares of the aforementioned founder will not be vested with him/her.

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Constricted transfer of shares:

This agreement should have another important clause related to the restricted transfer of shares of the founder. It may provide a clause of the lock-in period, which mandates the founder not to transfer his/her shares for a certain period, before the expiry of his/her term. Similarly, the method of valuation of the shares of the founder should be sorted out, before the expiry of his/her term.

Allotment of intellectual property:

The innovative ideas or inventions created by the person enjoy the benefits arising from it, and it remains the property of his/her. So here, the agreement should explicitly state that the intellectual property rights developed by the co-founders are allocated or owned by the company. and on the occurrence of any issues, it cannot be entertained by any individual.
Most of the companies will obtain intellectual property, initially in the name of co-founders. Later, it is assigned to the name of the company. The valuation of the company is determined by the intellectual property, including the clause in the agreement which will avoid future disputes.

Restraint on trade:

An agreement should be made in the form that no founder should indulge in any of the activities which conflict with the objective of the company. For instance, if any of the founders have decided to relieve themselves from the company then he should not engage in any competitive business for a stipulated year from the date of exit.

Terms of employment of co-founders:

The employment of co-founders should be full-time with the company. This agreement should elucidate the terms of employment, their roles, compensation, and benefits of each founder. There might be separate contracts regarding the terms of employment among co-founders, including their perks and benefits.

Dispute resolution

In case of any dispute arising between the co-founders, there should be an appropriate mode of dispute resolution mechanism, to be present. For example, if founders mutually agree to terminate the company, then the most preferred option for resolving this dispute is arbitration, mediation, etc.



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