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Startup Founders Agreement
Whether the company is small, medium or large, in the initial stage of the company it has to start from the scratch whatever they have in their possession. As we see that there are early rise startups which are becoming a very common practice in India. While setting up a new business the founders have to make an agreement between them for setting up the business & as an acceptance of a business proposal.
A founder’s agreement is basically an agreement in written form between the co-founders of the company, which is made in the need of stating properly rights, duties, responsibilities & liabilities. It is not a contract binding co-founders. It is an agreement which clearly sets out the strategy for issues like ownership, board of directors, admission or resignation of partners, etc.
Parties to the Founders Agreement
A founders agreement is made between two or more partners who are jointly called as ‘Co-partner/s’,’Shareholder/s’,’Party/ies’
Meaning of Founder’s Agreement
A Founder’s Agreement is an agreement made between the co-founders of the company when setting up a business. It is made while incorporating the business. It is made with respect to clearly set out that how things stand while setting up the business. Founders Agreement is also made to avoid the uncertain circumstances which can damage the smooth running of a business. It also helps to understand the risk involved in the business. A founder’s agreement is also known as:
- Co-founders Agreement
- Start-up Co-founders Agreement
Necessity of Founder’s Agreement
The Founder’s Agreement is made in respect to avoid ambiguity in future regarding business between co-founders. As we know there is always a possibility of happening an uncertain situation like death of one of the co-founder or resignation, continuation of the business. So to avoid the loss which it can do to business or happening of such situation will affect business. So to avoid this loss for a safety purpose founder’s agreement is made.
Points to Remember While Drafting Founders Agreement
There are some points we need to keep in mind while making a founders agreement. They are as follows:
1. Roles & Responsibilities:
Every co-founder is responsible for the actions which are done by every co-founder for business. As also a co-founder should also know his responsibility & his role in the functioning of the business.
2. Decision making:
Decision making plays a very important role. Every co-partner should participate in decision making for simple & substantial decisions. & every co-founder should also participate in decision making for the growth of the business to avoid further complications.
3. Ownership of the founders:
There needs to be an allocation of ownership & equity among co-founders. Every co-founder should act in his capacity as a founder member of the company.
Is payment of stamp duty is necessary
Stamp duty should be paid on non-judicial stamp paper. But stamp duty is not mandatory in case of founder’s agreement.
Is There a Need to Register Founder’s Agreement?
As such, there is no need to register the Founder’s Agreement. As making the same on stamp paper of non-judicial value is sufficient.
What factors we should keep in mind while framing a Founders Agreement?
- Before entering into a founders agreement a thorough discussion with all the co-founders regarding management, ownership, capital, investment, etc.
- Every co-founder of the business should be having the clarity
- A well-drafted agreement avoids all the possible ambiguities.
Important Clauses in Founder’s Agreement
On an average the Founder’s Agreement should contain the following details of setting up of business:
- The founders
- The project
- Initial capital
- Additional capital contributions
- Expenses and budgeting
- Ownership of the company
- Tax matters
- Distributions
- Management and approval rights
- Duties to the company
- Roles and responsibilities of each of the co-founders
- Compensation (salary drawn by each of the co-founders)
- Project-related intellectual property
- Confidentiality
- Third-party offer to invest
- Resignation and removal of founders
- Dissolution
- Dispute resolution
- Miscellaneous provisions relating to
a. intellectual property rights
b. non-compete clauses,
c. loans from founders,
d. severability etc. - Signature
Apart from these if there are additions are needed then it can be done as per the requirement.
Key Considerations of Founders Agreement:
1. Timing:
While making a founders agreement for setting up of business there should be no wastage of time & money as to decrease the cost & wastage. Considering the financial aspects of the company it is very much important to show the concern towards the timing of every single thing.
2. Protection of minority shareholders rights:
The proper framework should be done to protect the minority shareholders rights. To avoid the foul business strategies affecting minority shareholders.
3. Legal Advice:
Every co-founder must understand the terms of agreement & should take the independent legal advice to act accordingly.
Advantages for making a Founders Agreement
1. Clarity:
It clears all the doubts between co-founders & helps to build a strong relationship among partners.
2. Bifurcation:
It clearly helps to bifurcate the roles & responsibilities of each co-founder.
Procedure for Founder’s Agreement
1. All the co-founders have to draft the Agreement once the drafting is done all co-founders should scrutinize the same.
2. Once the finalization is done then all co-founders should sign on the agreement.
3. After signing is done it should be notarized on the non-judicial stamp paper of requisite value.
Roles & responsibilites of Co-founder
- Every co-founder must act in his own capacity as a product manager to know the requirement & to check whether they are mitigating the expectations
- A co-founder is also working closely related to the technicalities of the product & solve the same for growth perspective.
- There should be a considerable balance between budget management & capital requirement to minimize the risk of wastage.
- Formation of policies regarding marketing & operations
- Distribution of profits
- Working towards the technicalities of the business & improvising the same.
The penalty for Breach
If the Agreement is broken by reason like death or resignation or by any reason whatsoever, which ultimately affects the business growth at large. Then in such cases as per the severability of the loss, the damages should be paid.
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Founder’s Agreement FAQs
What is the Founder’s Agreement?
What is the purpose behind making a Founder’s Agreement?
Why there is a need to make a Founder’s Agreement?
What are the basic factors which are needed to make the Founders’ Agreement?
Is registration required?
What is the provision for stamp duty?
What are the benefits of Founder’s Agreement?
1. It gives clarity regarding the roles & responsibilities of each co-founder.
2. It simply depicts the overall functioning of business among co-founders.
3. It gives bird's eye view of every single detail about business like capital, management admission/resignation or death of any co-founder, etc.
Is there any specific format of Founder’s Agreement?
What all documents are required for making a Founder’s Agreement?
What is the procedure to make the founders agreement?
Draft the founders' agreement by putting all the required fields, once the Draft is complete make sure all the fields are covered if not put any additions if required.
Before finalizing the draft just let all the partners go through the draft.
Once the well-drafted agreement is ready it needs to get notarize on the non-judicial stamp paper.
After notarizing take the signature of all co-founders on the agreement if required.
