Founder's Agreement

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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.
Responsibilites of the Co-Founder While Making Founder's Agreement - LegalDocs

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?

A Founders Agreement is a document made between two or more person who wants to set up a business. It is basically made between the founder members of the business.

What is the purpose behind making a Founder’s Agreement?

Founder’s Agreement is made with respect to safeguarding the business interest & to avoid future problems.

Why there is a need to make a Founder’s Agreement?

While setting up the business there is a possibility that any of the co-founders may try to start his own business or if any partner leaves the business or by any other reason if he gives resignation or by death or any personal reason, then he should not carry on the same activity under any circumstances or he should not violate any of the business policies. So to avoid all these possibilities founder’s agreement is made.

What are the basic factors which are needed to make the Founders’ Agreement?

Founder’s Agreement should have the following basic factors without which a founders agreement is of no use:A. All the roles & responsibilities of all the co-founders should be mentioned properly B. Allocation of equity ownership & vesting should be done precisely because sometimes some issues are extremely delicate which should be tackled without any nudge. C. When creating any business strategies or product design you need to be careful. When any new product design or any strategy is introduced then you need to take care that it should remain with the founders only not with any other individuals.

Is registration required?

In case of Founders’ Agreement, registration is not even the requirement when it comes to functionality of the Founders’ Agreement.

What is the provision for stamp duty?

Founders Agreement needs to get notarize on the non-judicial stamp paper of the required value. As we all know stamp duty varies as per the necessity. So one needs to make sure that he comes under the exact slab.

What are the benefits of Founder’s Agreement?

The benefits of Founder’s Agreement are as follows:
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?

As it is a legal document which carries the legal relation between all the co-founders. If you want one sample then you can find it on our site.

What all documents are required for making a Founder’s Agreement?

To make Founder’s Agreement one need not required any documents. The only requirement is to draft the agreement on the paper & then notarize the same on non-judicial stamp paper.

What is the procedure to make the founders agreement?

To make the founders' agreement one has to do the simple procedure:
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.

What is the penalty for breach of agreement?

Penalty for breach of the agreement depends upon the severeness of the breach.As one could not tell the intensity of breach. So it varies as per the situation.
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