A Founders Agreement is an agreement between the cofounders that outlines important terms. Having a Founders Agreement from the outset will provide the founders with a clear understanding of what to expect when the company truly begins to operate.
Below are five key points to consider in your Founders Agreement.
Roles and Responsibilities
When a startup company begins to operate, founders tend to do many different things for the company. However, as the company matures and becomes more complex, founders may find themselves debating amongst each other as to who does what if their roles and responsibilities were not clearly defined from the beginning. It would be prudent for the founders to determine their positions and responsibilities to help avoid potential confusion or contention amongst the founders.
There are two trains of thought for granting equity to founders: (a) all founders receive an equal amount, or (b) each founder receives varying amounts depending on certain factors. Whichever option you decide, it would be wise to consider implementing a vesting schedule for the founder’s equity because upon resignation or removal, all unvested equity interest would terminate.
Founders create things for the company all the time, but sometimes it isn’t always clear as to who owns it. It would be difficult if a founder starts to believe that the product/service he or she created belongs to the founder, and not the company. To protect the company, the Founders Agreement should make the founder assign all intellectual property he or she creates and all related intellectual property rights to the company.
Capital Contributions and Distributions
It is very important that the Founders Agreement list the contribution (whether being cash, an asset, or services) the founder provided to the company. This will make it easier to ascertain who invested what before and after inception of the business, and will help determine how to calculate distributions (if any).
Resignation/Removal of Founder
It is also important to know what will happen to a founder (and the founder’s equity interest) if he or she decides to resign or is removed from the company. The Founders Agreement should outline the process of what happens upon such an event.
Although it may be uncomfortable to discuss the items above amongst your cofounders, having a Founders Agreement that establishes these points from the outset are crucial to a successful relationship, and ultimately, a successful startup company.
For further information or questions, please contact Andrew Lee or any of the other attorneys at Shulman Bastian Friedman & Bui LLP at 949-340-3400.