Start-up Law: What is a Founders’ Agreement?
What is a Founders' Agreement?
If you’re an entrepreneur developing a ground-breaking idea, you’ve surely spent many late nights researching and imagining about how to bring your idea into the development stage and beyond. In the early stages, it is nice to have co-founders who share your vision and whom you can lean on during challenging times. With visions of success and opportunity on the horizon, the excitement and momentum of starting a business can propel you forward. Before launching into the complexities of entrepreneurship, take a moment to see how far your business concept has developed because while starting a business is hard, running it can be even harder.
A Founders’ Agreement is a legally binding contract that serves as a blueprint for how the Founders will run the business before they begin. It is an agreement that outlines the roles, rights, and responsibilities of each owner in a business. In drafting a Founders’ Agreement, it is the founders’ intention to collaborate with the purposes of developing the business concept. Naturally, it is implemented during the business concept stage prior to the formation of a corporation that is intended to further develop the business concept and the issuance of shares.
Why are Founders' Agreements important?
Pressing pause to ensure your business plan and ideas are protected is especially important when running a business with co-founders. As a startup, your co-founders and partners play an essential role in the development of the business concept. Aside from comradery and emotional support, co-founders who work through difficult issues together and are involved in early-stage decision-making begin to form the culture of the future company. Differing opinions can be healthy and can help keep founders grounded. Additionally, as a startup, your co-founders play a key role in mitigating risks and dividing responsibility. For instance, from an investor’s perspective, a company with multiple founders that has clearly outlined the founders’ roles, rights, and responsibilities means greater stability and organization. Although you cannot predict the future, you can control the present. Thus, drawing up a Founder’s Agreement is best done during the stages between the Idea Stage and the Development stage.
Why do I need a Founders' Agreement?
Think about any team activity you have been a part of in the past and how often you have asked yourself the following questions:
- Why am I doing all the work?
- What are everyone’s roles?
- Is my teammate doing more than expected?
- Is one teammate doing too little?
- Is one teammate overlapping on another teammate’s tasks?
No matter how aligned and how well a team works together, in the startup world these issues are bound to arise as the company develops and seeks to raise capital. There will be differences of opinion on direction, strategies, and roles. A Founders’ Agreement is the mechanism which, if drafted correctly, can provide clarity and direction on future issues so that you do not have to second guess the answers to questions that can keep you up at night. Sometimes co-founders are on the same page about every topic, while other times compromising on trivial details may be in order. Nonetheless, it is important not to shy away from challenging topics. Establishing a mutual understanding early on can only strengthen relations; you should strive to be honest, thoughtful, and collaborative.
Top Victoria Start-up Lawyers
Our team of entrepreneurial-minded corporate lawyers in Victoria, BC, understand that an excellent Founders’ Agreement begins with the founders’ vision for the Company. We help early-stage businesses draft detailed, customized Founders’ Agreements that can incorporate the following elements:
- ownership structure and transfer;
- initial capital contributions;
- roles and responsibilities of the founders;
- voting and decision-making power;
- company goals;
- intellectual property assignments;
- vesting schedules and share restrictions;
- salary and compensation;
- removal or departure of founders;
- dissolution and termination; and/or
- dispute resolution.
We can meet with you and your partners- virtually or in-person- to discuss numerous topics, some easy and some hard. The information we gather from the meeting, combined with our law firm’s expertise, will provide the structure and clarity for developing your business. Alternatively, if you’ve drafted a Founder’s Agreement on your own and would like a legal opinion on whether your bases are covered, we’d be more than happy to assist and review at an economical rate.
A Cautionary Note
This article provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.