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A founders’ agreement is critical in establishing a solid foundation for your startup’s success. Within this legally binding document, you will outline the terms and conditions of your partnership with your co-founders. It will set the framework for vital aspects of your business plan, such as decision-making and dispute resolution. This article will explain several key terms of a founders’ agreement. By understanding the key terms of a founders’ agreement, you can protect your interests, clarify your obligations and mitigate the risk of potential conflicts arising further down the line.
1. Roles and Responsibilities
Within the founders’ agreement, you should outline each founder’s roles and responsibilities. These terms will clarify each founder’s duties and decision-making abilities. In this section, you should use explicit language. Doing so will help maintain clarity within your startup and establish a cohesive working relationship among founders.
Specific areas these terms should cover include:
- day-to-day operations;
- decision-making processes; and
- the division of labour.
2. Equity
Equity allocation is a fundamental aspect of a founders’ agreement. These terms detail how you will divide ownership in the startup among founders, typically in percentage ownership.
The agreement should outline the initial distribution of equity ownership and provisions for issuing further equity. Such provisions may include:
- buyback rights;
- vesting schedules; and
- dilution protection.
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3. Capital Contributions
If applicable, specify each founder’s initial financial contribution to the startup. Also, define any ongoing financial obligations or commitments from founders, such as:
- future capital contributions; or
- funding rounds.
4. Intellectual Property Ownership
Intellectual property provisions in a founders’ agreement address the ownership of intellectual property assets that you and other founders create for your startup. These terms should specify that all intellectual property developed by the founders in the course of their work belongs to the company. You can also stipulate the procedures for disclosing and assigning intellectual property rights to the company.
The ideal scenario is for a startup to own its intellectual property outright. Ensuring intellectual property ownership simplifies matters and can add value to your business. This ownership instils confidence in potential investors, demonstrating the stability of your startup concept.
Moreover, having your startup own its intellectual property rights can mitigate the risk of costly disputes. For example, suppose a co-founder exits the startup due to a conflict, and they retain the rights to the startup’s intellectual property. This situation could complicate the startup’s use of that intellectual property, leading to potential litigation and financial strain.
5. Non-Disclosure and Confidentiality
The agreement can additionally impose obligations on founders to maintain the confidentiality of sensitive information and trade secrets belonging to the startup. These terms protect the startup’s information from unauthorised disclosure by you and other founders, both during and after your involvement in the company.
6. Dispute Resolution Mechanisms
You should also include procedures for resolving disagreements or conflicts among founders. Dispute resolution methods may include:
- mediation;
- arbitration; or
- negotiation.
This framework can help you avoid costly legal disputes by providing a structure for settling disputes amicably and efficiently.
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7. Exit Terms
You should outline the processes and consequences of a founder’s departure from the startup. These terms should address issues relevant to a founder’s exit, such as:
- equity-related rights;
- non-compete clauses; and
- confidentiality obligations.
For example, non-compete clauses can safeguard the startup’s interests even after a founder’s departure. They restrict founders from engaging in business activities that directly compete with the startup for a defined period.
Key Takeaways
A founder’s agreement is crucial for establishing a solid foundation for your startup’s success. It outlines the terms and conditions of your partnership with your co-founders in your new business. Within the agreement, you should:
- clearly define each founder’s roles and responsibilities;
- detail how you will divide ownership in the startup among founders and additional stakeholders;
- specify each founder’s initial financial contribution and define ongoing financial obligations;
- ensure that all intellectual property founders develop in the course of their work for the startup belongs to the company;
- impose obligations on founders to maintain the confidentiality of sensitive information and trade secrets, both during and after their involvement in the startup;
- establish procedures for resolving disagreements among founders; and
- outline processes for a founder’s departure from the startup.
If you require legal assistance to draft a founders’ agreement or advice about its key terms, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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