Thinking about new ideas and plans to launch a startup might look straightforward, but implementing those ideas and plans in the real world to launch a startup can be a very challenging task. It is accessible that in the business life hassle, the Co-founders might forget to prepare a Founder’s agreement within themselves, which might lead to possible confusion and later lead to fights among the co-founders among various issues that would require clarification, which is why the Co-founders need to prepare a Founder’s agreement.
Co-founders starting a Business trust each other, which is why they have joined hands to create a new business venture. But having a legal document which defines every detail of the business relationship between the Co-founders is essential for a Business to Flourish.
An agreement between the co-founders relating to their own set of roles and responsibilities in the firm is of vital importance. In this blog, we will learn about Founder’s Agreement, the meaning and definition of the Founder of a Company, the constituents of a founder’s agreement and the difference between a Founder and vs Co-founder.
Did you know? The founder’s Agreement is a legally binding agreement which all the co-founders must agree to before the launch of a Business venture to define their business relationship.
Who is a Founder, and What is a Founder’s Agreement?
A Founder of the business is someone who has come up with a new idea and a plan and has transformed that idea and the given set of projects into reality by starting his business venture with that idea itself. A founder is the one who sets up his business venture or does it with the help of a team who have come on board with the founder based on his ideas of a business, known as co-founders. Together, a business's founder and co-founders are the first ones who eventually start a business.
A founder’s agreement is a legally binding contract that all the co-founders of a startup business venture can enter to define their business relationship. The contract between the founders covers all the essential details related to the investment made by each founder in the business, the list of the number of partners in the business and the specific amount of capital they have contributed to the business, and many more such essential terms.
Why is a Founder’s Agreement Required?
A founder’s agreement is required by the business and is of vital importance for the following reasons:
- It is required to guide against the potential issues that the founders might face in a startup business.
- There is a high chance that the personal interests of the founders might take over the interests of the business, which is why a legal document like the founder’s agreement must be prepared.
- It helps outline the founders' interests, including contribution, structure and roles and responsibilities.
- It also contains steps on dissolving the business and what would happen if a founder suddenly decides to quit the business.
Also Read: 200+ Small Scale Business Ideas with Low Investment
The Founder’s Agreement Template
Documents are of primary importance to the company. Below is a sample of what a founder’s agreement looks like:
Constituents of a Founder’s Agreement.
Several key terms are discussed in the agreement between the founders, which are discussed below:
-
Ownership in Equity
Each of the co-founders of the business has a certain proportion of equity ownership in the company, which is determined by considering several factors such as the amount of investment made by the co-founder, number of years of experience, and network in the industry. The co-founders would require voting rights on matters of deliberations related to the company, which is why equity ownership is essential to be provided to them.
-
Vesting
To deal with a founder exiting or being ousted from the company, the vesting structure needs to be carefully incorporated into the agreement. There are two kinds of vesting, which are:
-
Time-based vesting
Under this method, an amount is being vested based on the proportion of time spent by a founder of the company so that if the founder quits the company before the expiry of a particular term, the remaining shares of the founder will be then returned to the company.
-
Milestone vesting
This kind of vesting occurs when the company achieves certain milestones. When a founder decides to leave the company before the achievement of milestones, the shares do not vest for the founder.
-
Roles and Responsibilities
An agreement between the founders mentions the roles and responsibilities of each co-founder divided into various operations like marketing, administration and finance.
-
Transfer of Shares Restriction
The agreement between the founders may provide a specific lock-in clause, mentioning the number of years before the expiry of which a co-founder is not allowed to transfer the shares he owns in the company. The agreement should mention how to handle a situation of a founder leaving the company before the expiry of the lock-in period.
Also Read: Real Estate Business Plan - Complete Guide to Start Real Estate Business in India
-
Value addition by founders
The company's co-founders provide value additions through various intellectual property rights and the required technical know-how. Hence, the co-founders clearly must understand the nature of the value addition they are expected to provide, which is why the founders’ agreement should mention the number of shares to be issued. The per cent of the shareholding in the company so that there is no confusion between the co-founders.
-
Employment
Originally, the co-founders are presumed to be in full-time employment with the company, and there should be clear communication in the agreement between the founders about the designation, terms of employment and the amount of compensation and benefits they will be paid.
-
Confidentiality
The founders and co-founders of the company are expected to know a lot of sensitive information about the business, which can even be trade secrets. Through a founder’s agreement, the company's co-founders should be restricted from sharing confidential information. At the same time, he is associated with the company, as this may cause a significant amount of damage to the business as a whole.
-
Businesses' Decision making
The company may be required to take bold or complex decisions in its day-to-day functioning. Hence, the founder’s agreement must state how to exercise or conclude simple and complex decisions. Also, the structure of the board and decision-making are allocated to the company's chief executive officer, who is appointed by the board of directors.
-
Resolution of Disputes and Termination
The agreement between the founders should prescribe the company's and the co-founders' rights to terminate the agreement, with or without the mutual consent of the parties involved. The agreement should provide a clear structure for the resolution of the disputes between the company and co-founders related to many matters of importance.
Also Read: What is the Marketing Mix? The 4Ps of Marketing: A Detailed Overview
Brief Study on Founder vs Co-founder,
A founder and co-founders are essential to the business. Still, there are specific differences between these two terms that set them apart from each other:
- A Founder is the one who comes up with the idea and transforms that idea into successfully starting a business. A co-founder is a person who is founding a company with the founder.
- The Responsibility of the founder is to arrive at an idea which is profitably feasible for the company to look into and to decide on various services and the products his company or business will be willing to offer. On the other hand, Co-founders bring the necessary skills to help the founder with his business idea. Their skills can be helpful for the business as they can be technical or about resources or capital to invest in the business.
- A Founder is expected to have a more significant shareholding in the company compared to his co-founders' shareholding.
Conclusion
This was all about the founder’s agreement, the meaning and definition of a founder, constituents of a founder’s agreement and the brief study of a founder and their differences with their respective co-founders. These terminologies and their intricacies are integral parts of running a business. They can be a big concern if respective individuals are not paying enough attention to these.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium enterprises (MSMEs), business tips, income tax, GST, salary, and accounting.
