When starting a small business, funding is often an issue. As a result, you would look for investors or partners to help you jumpstart your vision. Sometimes, these partners want in on the business. When this happens, you must create a founders’ agreement.
What is the Founders’ Agreement?
A founders’ agreement is a contract – a legally binding one that outlines the rights, roles, and responsibilities of each of the business owner. Depending on your business model, it can be incorporated into the corporate by-laws, a partnership agreement or a standalone document. This agreement is necessary to protect the interests of the founders and prevent any potential conflicts later on.
The Importance of Creating a Founders’ Agreement
Most business owners would rush to get the business running that they forget about the legalities among founders. The founders’ agreement will serve as the basis of all of the founders’ relationships and roles within the business. This agreement will have a significant impact later on, should you decide to expand or close down your business. Never ignore this document.
For others, it serves as an insurance against unexpected turns in the business. It must be done as soon even before you draw up an actual business plan. While it is impossible to predict what will happen to the company in the future, you can control what happens in the present, and that includes this agreement.
A founders’ agreement is important because it:
- Helps clarify each founder’s role in the company.
- Can be a basis for resolving disputes among founders.
- Provides clarification on when a partner can come in or exit the business.
- Helps protect the minority owners.
- Sends a signal to potential investors that you are serious about your business.
What Should You Include in Your Founders’ Agreement?
Now that you have an idea about the said agreement, it is time to take a closer look and learn about the things that you should include into this critical document.
Here are the items that you must include in the agreement:
The Business Name and Co-Founders’ Names
When writing up the contract, you have to be clear on which particular business they agree to. This document protects other companies you may have. It is also mandatory to include legal names of the founders.
The Validity of the Agreement
You also have to clarify the validity of the agreement. When thinking about this area, you have to factor in a potential exit plan. The contract should not bind you to work on the business even if it is failing already. You can always add a clause for renewal if you feel like your business will prosper and expand later on. To be safe, include a realistic time frame.
Goals of the Company
Any business document must include your company goals, including the products you offer and the industries you will tap. The goal is crucial for predicting and recording your operations. You can tweak this as your company evolves, but it needs to be there.
Roles and Responsibilities of Each Founder
This section is the most important part of the agreement, as this will avoid confusion and redundancy in your business. When each founder knows their roles, they will have an easier time to accomplish their tasks. The more specific roles you input, the more efficient will be the operations and management of the business. The roles and responsibilities will help you cut costs and manage time better. Correctly set roles and responsibilities allow employees to understand who has the final say on the different areas of the operations. It also creates a concrete system of accountability.
Co-founders put in time, money, and effort into the business. Their share in the company should be clear from the get-go. This breakdown will help you prevent future misunderstandings, broken relationships, and litigation in the future. You also have to include the method and amount of distribution.
When investors and co-founders get their share from the company all at once, there may be nothing left to make the company operate and grow. Agree on a vesting schedule so you can ensure that no investor will suddenly hit the snooze button and leave you doing all the work.
Make sure to include this depending on your business model. If your organisation comes up with a unique or exciting product, you have to make sure that your company retains ownership of it. Co-founders may suddenly leave and bring all these ideas to start their own company. The rights should go to the business itself and not on any person, including you. For example, a co-founder comes up with a system for creating software. Include in your agreement that all intellectual property for the business becomes the sole property of the company.
Salary and Compensation
Salary and compensation should be clear from the start, so all co-founders know what to expect when the money starts coming in. More often than not, businesses fall out because of unclear financial issues. You can be as detailed as you want to be such that you may include clauses for future expansion.
Exit clauses are important to protect your business. It looks at the possible future when co-founders are no longer giving 100% to the business. It could be useful for co-founders who want to exit the business. While this may be a bit awkward to discuss at the beginning of the business, it should not be overlooked.
Setting up a business, no matter how small it can be, must have a solid foundation that can support them in the future. Many investors commit the mistake of postponing these discussions when the business has taken off only to regret in the end. Sitting down with your co-founders to discuss all this information shows that you are serious about the company. When investors see that you have everything laid out, they will be more willing to invest in your business. Besides, you have to send that signal that this tiny idea can change your and the co-founders future.