{"id":10349,"date":"2020-05-02T16:04:32","date_gmt":"2020-05-02T10:34:32","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=10349"},"modified":"2020-05-04T19:14:56","modified_gmt":"2020-05-04T13:44:56","slug":"founders-agreement-important-provisions-and-key-contents-in-drafting","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/","title":{"rendered":"Founders Agreement: Important provisions and key contents in Drafting"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3a62097e835\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3a62097e835\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Overview\" title=\"Overview\">Overview<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Meaning_of_Founders_Agreement\" title=\"Meaning of Founders Agreement\">Meaning of Founders Agreement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Who_are_the_Parties_to_a_Founders_Agreement\" title=\"Who are the Parties to a\nFounders Agreement?\">Who are the Parties to a\nFounders Agreement?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#What_is_the_need_of_a_Founders_Agreement\" title=\"What is the need of a Founders Agreement?\">What is the need of a Founders Agreement?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Things_to_consider_before_drafting_a_Founders_Agreement\" title=\"Things to consider before\ndrafting a Founders Agreement\">Things to consider before\ndrafting a Founders Agreement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Key_Contents_of_a_Founders_Agreement\" title=\"Key Contents of a Founders\nAgreement\">Key Contents of a Founders\nAgreement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Procedure_to_be_followed_for_Founders_Agreement\" title=\"Procedure to be followed for\nFounders Agreement\">Procedure to be followed for\nFounders Agreement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Advantages_and_Disadvantages_of_a_Founders_Agreement\" title=\"Advantages and Disadvantages of\na Founders Agreement\">Advantages and Disadvantages of\na Founders Agreement<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Advantages\" title=\"Advantages-\">Advantages-<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Disadvantages\" title=\"Disadvantages-\">Disadvantages-<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/swaritadvisors.com\/learning\/founders-agreement-important-provisions-and-key-contents-in-drafting\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Overview\"><\/span>Overview<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"has-drop-cap\">When a company is in its incorporation stage, it is best to have a legal agreement that lays down the roles and responsibilities of the persons associated with the company. There are a number of legal agreements that can be entered into for the better functioning of the company. One such agreement between the co-founders of a company is known as the Founders agreement. Usually, an agreement is drafted in the incorporation stage to avoid any ambiguity that may creep up in the enterprise in the future. The legal agreement between the co-founders specifies the roles and responsibilities of each co-founder. In this article, we shall have a basic knowledge of the <strong><a href=\"https:\/\/swaritadvisors.com\/founders-agreement\">Founders agreement<\/a><\/strong> and its key inclusions while drafting. <\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Meaning_of_Founders_Agreement\"><\/span>Meaning of Founders Agreement<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>A founders agreement\nis an agreement which is in written form between the co-founders of a company.<\/strong> &nbsp;It is also called a Co-founders agreement or a\nstart-up Co-founders agreement. While commencing a business, the founders of\nthe company make an agreement for setting up the business. The agreement specifies\nthe rights, ownership, initial investments, responsibilities, duties, and\nliabilities of the co-founders of the company. As a legally binding document,\nthe agreement must be in detail, and the absence of loopholes should be ensured\nlest be exploited in the future.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Who_are_the_Parties_to_a_Founders_Agreement\"><\/span>Who are the Parties to a\nFounders Agreement?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The parties to such an agreement\ninclude the two or more partners who are known as the Co-partners or\nshareholders in a company.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_the_need_of_a_Founders_Agreement\"><\/span>What is the need of a Founders Agreement?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As we all are aware that there are\nthings in life that are uncertain, but it may happen in the future like the\ndeath of the co-founder or any business conflict or any ambiguity relating to\nany rights, liabilities, etc. Therefore, in order to avoid the loss caused by\nsuch uncertain events, an agreement such as this will ensure the safety of each\nfounder of a company. <strong>The founders&#8217;\nagreement identifies any possible prospective risks or any complications that\nmay arise during the business. It proposes provisions to deal with such a\nsituation or helps in avoiding such a situation<\/strong>.<\/p>\n\n\n\n<p><strong>The\nagreement is just like an insurance against any uncertain event<\/strong>. It provides a structure\nto resolve the dispute among the founders and clarifies the role of each business\nowner. This legal agreement also protects the interests of the minorities and provides\nenough light on whether or when a partner wishes to exit or enter the business.\nNo one can predict the future but can control the present therefore consulting\nan expert prior to drafting a founder&#8217;s agreement is highly recommended so that\nall the necessary inclusion are made in the agreement, and even if the\nsituation shifts in the future, it is not a big deal for you.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Things_to_consider_before_drafting_a_Founders_Agreement\"><\/span>Things to consider before\ndrafting a Founders Agreement<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>There are a few vital aspects that\nmust be considered prior to drafting of a founder\u2019s agreement so that all\npossible ambiguities are avoided. <strong>Before\ndrafting, there must be a sincere discussion about among all the co-founders\nregarding the management, investment, ownership, remunerations, etc.<\/strong> the\nclarity among the founders must be reflected in the agreement. Every detail\nregarding the components of the agreement should be discussed thoroughly and\nwhere the conclusion is uniformly accepted by all co-founders.<\/p>\n\n\n\n<p>Another critical consideration to be\nmade is pertaining to the protection of the rights and interests of\nshareholders. The agreement should involve proper framework so that there are\nno foul strategies in the business that affects the minority shareholders. The\nassistance of an expert should be preferred while drafting so that the\ninterests of all, including the business, are secured in all manner.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Key_Contents_of_a_Founders_Agreement\"><\/span>Key Contents of a Founders\nAgreement<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>When drafting a founders agreement, there are certain essential inclusions that must be included in the agreement so that there are no issues in the clarity of the document. <strong>The key contents are specified below.<\/strong><\/p>\n\n\n\n<ul><li><strong>Name of the co-founders and Business<\/strong><\/li><\/ul>\n\n\n\n<p>The agreement should\ncontain the name of the co-founders and the company for which they are agreeing\nthe rules. The agreement must describe the company\u2019s venture and its purpose in\ndetail.<\/p>\n\n\n\n<ul><li><strong>Details of ownership<\/strong><\/li><\/ul>\n\n\n\n<p>The details of the\nownership must be specified clearly in the agreement. The ownership shall be\ndistributed in shares or percentage of the company&#8217;s value.<\/p>\n\n\n\n<ul><li><strong>Roles and Responsibilities<\/strong><\/li><\/ul>\n\n\n\n<p>The role of each person must be explicitly mentioned in the agreement. Making assumptions regarding the roles and responsibilities may lead to conflict in the business. Different co-founders may have a different point of view regarding his role from the other. The undefined roles lead to ambiguity and may threaten the future of the company. Therefore what each person would do and the extent of their responsibilities should be clearly laid down. The role that an individual shall play in the future must be designated in the agreement right at the start. It is highly imperative to pre-define the <strong>roles and responsibilities in the agreement<\/strong>.<\/p>\n\n\n\n<ul><li><strong>Initial Capital<\/strong><\/li><\/ul>\n\n\n\n<p>The initial investments to\nthe company\u2019s development must also be included in the agreement.<\/p>\n\n\n\n<ul><li><strong>Details of Capital raised<\/strong><\/li><\/ul>\n\n\n\n<p>The agreement shall also\ninclude the details about the capital raised by the investor and the founders\nof the company.<\/p>\n\n\n\n<ul><li><strong>Conflict resolution<\/strong><\/li><\/ul>\n\n\n\n<p>The process and procedure\nof conflict resolution must be included as they are an inevitable aspect of any\nlong term business. Conventional methods of resolving conflicts include\narbitration or through a neutral party who is engaged with trust etc. The\nexpress provision of conflict resolution in the agreement at the beginning\nitself shall help in making the matter easier.<\/p>\n\n\n\n<ul><li><strong>Confidentiality<\/strong><\/li><\/ul>\n\n\n\n<p>It is one of the essential\nclauses of any agreement. The confidentiality clause shall impose an obligation\non the co-founders to keep the sensitive matters related to the business\nconfidential. <\/p>\n\n\n\n<ul><li><strong>Compensation<\/strong><\/li><\/ul>\n\n\n\n<p>The issue of compensation\nor salary drawn by each of the co-founders and the determination of the\ncompensation are critical aspects. General perception could be that one who\ninvests large sum in the company&#8217;s finances would also receive larger\nremuneration. At the same time, it must be noted that risk tolerance differs\nfrom each individual. All these matters should be taken care of right at the\nbeginning.<\/p>\n\n\n\n<ul><li><strong>Removal of Founders<\/strong><\/li><\/ul>\n\n\n\n<p>The clause mentioning the <strong>removal of founders<\/strong> is a necessary clause, and the detail regarding when and how a founder shall be removed must be addressed in the agreement. The absence of such a clause may lead to future conflict. The act or circumstances under which a founder can be fired should be laid down with each co-founders assent. These circumstances may include the offense of fraud with the company, unjustified absence from the work, or any other situation which makes them incapable of carrying out their business.<\/p>\n\n\n\n<ul><li><strong>Dissolution of the Company<\/strong><\/li><\/ul>\n\n\n\n<p>The details regarding the\nsituation under which the business shuts down or what shall happen if the\nbusiness becomes unviable and how shall the founders distribute liabilities,\nassets, or any money when the business is terminated, should be included in the\nagreement. Each situation could be a possibility; therefore, every aspect must\nbe covered.<\/p>\n\n\n\n<ul><li><strong>Miscellaneous Provisions like Copyright Assignment,\nNon-compete clauses etc.<\/strong><\/li><\/ul>\n\n\n\n<p>Once your business expands\non a product or platform, it implies that you have started creating an\nIntellectual Property. It&#8217;s essential to clarify as to what pertains to your\ncompany and how it shall be used to protect your ideas. It must be designated\nhow an Intellectual Property is of your company and not of individuals like owners,\nemployees, etc. The terms for selling IP and who gets the revenue may also be\noutlined in the agreement. <\/p>\n\n\n\n<p>A non-compete clause is a\nvital part of the agreement that ensures that the founders don&#8217;t branch out and\ncommence their own businesses and begin competing with the original business.\nOne may require the founders to enter a separate contract of employment with\nthe incorporated business once the incorporation is completed. A non-compete of\n3 to 5 years is common.<\/p>\n\n\n\n<ul><li><strong>Loan from founders<\/strong><\/li><\/ul>\n\n\n\n<p>The handling of loans received from the founders must be included in the agreement. It can be paid back with interest or without interest, or it may be compensated through the <strong><a href=\"https:\/\/swaritadvisors.com\/learning\/how-to-issue-a-company-share-certificate\/\">issuance of shares<\/a><\/strong> of the incorporated entity. This issue is common among the founders as they loan money to a business without investors so that their business is kept afloat. Founders lending money may, at some stage, feel that their contribution to the business is not rewarded justly, so it must be dealt with in the agreement.<\/p>\n\n\n\n<p>While drafting the founder&#8217;s\nagreement, a legal expert must be consulted; this will help in eliminating\nloopholes that may be exploited later.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Procedure_to_be_followed_for_Founders_Agreement\"><\/span>Procedure to be followed for\nFounders Agreement<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ol><li>Have sincere discussions\nwith the co-founders regarding the role of each individual, compensation\nprocess, termination clauses, or any other concerns. Cover every factor so that\nthere are no problems later.<\/li><li>Then consult a legal\nexpert who shall make you known about the process. He may make essential\nadditions or omissions to the agreement if necessary. <\/li><li>Once the objective of the\nagreement is clear, the lawyer will draft a sample of the agreement. <\/li><li>The sample of agreement\nshall be sent to you for your review. Discuss it with your co-founders.<\/li><li>Finally, the document is\nsigned by all the co-founders, and unless it is signed and dated, it won&#8217;t be\nlegally binding.<\/li><li>The complete process takes\nabout 3 to 4 working days.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages_and_Disadvantages_of_a_Founders_Agreement\"><\/span>Advantages and Disadvantages of\na Founders Agreement<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages\"><\/span>Advantages-<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>When a new business is established,\neveryone is excited about the opportunities and the journey ahead of them.\nWhile it is an excellent plan to remain positive and plan for success, but\nplanning must also be made for potential pitfalls in the journey. Questions\nlike what happens if things don&#8217;t go as planned or how do I protect my business\nmust not be ignored. One should consider these issues and talk with your\nco-founder about covering all of those in the agreement upfront. It will ensure\nthat your business is not left in tatters.<\/p>\n\n\n\n<p>The business partners must have\ndiscussions and align their expectations before they draft the agreement. <strong>In case you don&#8217;t have a founders\nagreement, then it would be difficult to navigate when an issue arises.<\/strong>\nFailing to plan in advance can put your business in difficulty before you\nstart. Absence of such an agreement not only may lead to endanger your\nbusiness, but it may also cost you hard as you may require to pay legal costs\nand other costs to keep your business afloat.<\/p>\n\n\n\n<p><strong>Having such a\nlegal agreement shall provide more clarity to the roles and responsibilities of\neach co-founder and shall help in facilitating a strong relationship among the\npartners.<\/strong>\nIt shall help in resolving the disputes quickly and shall clear any doubt among\nthe founders. The chances of arising ambiguities are also less, and even if it\narises, it can be cleared by referring to the agreement.&nbsp; <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Disadvantages\"><\/span>Disadvantages-<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There is least number of chances of\nhaving a disadvantage for having the agreement in place, and <strong>the slight disadvantage that may exist\noften arises due to having agreements that are not well-drafted or that which\nlacks precision.<\/strong> Proper advice and caution are needed because being overly\nprescriptive or an imprecise agreement can invite disputes.<\/p>\n\n\n\n<p>The above-mentioned points may help\nfounders to lay a strong foundation for their business relationship and for the\ngrowth of their company.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p> A founders agreement may not seem like an exciting or a crucial part of being a business professional, but the fact of the matter is it is an essential and fruitful agreement. There have been many establishments that have struggled due to lack of such an <strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Agreement\">agreement<\/a><\/strong>; therefore, keeping in mind what it brings to the table, it is suggested to draft a Founder\u2019s agreement upfront when you are starting a new business. <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Overview When a company is in its incorporation stage, it is best to have a legal agreement that lays down the roles and responsibilities of the persons associated with the company. There are a number of legal agreements that can be entered into for the better functioning of the company. One such agreement between the [&hellip;]<\/p>\n","protected":false},"author":19,"featured_media":10351,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[615],"tags":[616],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10349"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=10349"}],"version-history":[{"count":5,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10349\/revisions"}],"predecessor-version":[{"id":10355,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10349\/revisions\/10355"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/10351"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=10349"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=10349"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=10349"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}