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What is a Founders Agreement?
A founders agreement is an official contract or legal agreement signed by the company’s co-founders when starting a business. This agreement defines each founder’s tasks, rights and duties, responsibilities, ownership, liabilities, and investment share.
- A founders’ agreement should be formed in writing rather than orally.
- Co-partners/parties are two or more partners who enter into the founders’ agreement together.
- All co-founders will sign the agreement immediately when the firm or company is formed.
The founders’ agreement’s goal is to avoid business disputes that may occur between co-founders over time. This agreement has outlined the founders’ plan, requiring them to behave within the parameters and adhere to the obligatory terms.
Founders agreements also aid in dealing with unforeseeable events, such as the death of a co-founder or resignation, directly impacting the business’s or firm’s ongoing growth and smooth operation.
Benefits of a Founders Agreement
Critical Terms Used in a Founders Agreement
This section identifies the co-founders’ names and distinct roles and responsibilities inside the organisation.
This section describes the business’s equity ownership structure and the proportion of ownership held by each co-founder.
The vesting timeline for each co-founder’s equity ownership in the company is outlined in this section. Vesting is a strategy that assures co-founders receive their shares over time, often over four years, with a one-year cliff.
Management and Control
This section describes the company’s decision-making structure, including the method for making significant choices and the roles and duties of each co-founder in the decision-making process.
The founders’ agreement section handles intellectual property ownership and protection, including patents, trademarks, copyrights, and trade secrets.
Confidentiality and Non-Disclosure
This section describes each co-founder’s responsibility to maintain the privacy of the company’s proprietary information and trade secrets.
Termination and Exit
This section describes the situations that may lead to the termination of a co-founder from the firm and the process for departing the company, including the right of first refusal and buyout clauses.
This section outlines the method for settling conflicts among the co-founders, which includes mediation and arbitration.
Documents Required For Founders Agreement
- Address verification for all co-founders.
- Proof of identity for all co-founders.
- Witness identification is required.
- A well-defined company goal.
- The total amount of equity shares held by each co-founder.
- The total percentage of each co-founder’s shares.
Major Clauses of Shareholders Agreement (SHA)
Procedure for Drafting a Founders Agreement
The following steps are included in the method for drafting the founders’ agreement:
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Frequently Asked Questions