Founder Agreement

A Founder’s Agreement is an official contract that is signed between all the co-founders of a firm. This document states all the responsibilities, ownership, and initial investments made by each of the founders of the company. It is advised to make a founder’s agreement at the incorporation stage of an enterprise as it will lay out the responsibilities and roles of each of the co-founders.

Mainly, an agreement is made at the time of the incorporation to avoid the ambiguity that may arise in the enterprise in the future. It also sets up the expectations and goals of all the co-founders by assigning each of them a specific role and responsibility towards the betterment of the enterprise.

Now, let us look at the essentials that are a must in any founder’s agreement Online in India. They are:

• Definition of the business
• Details of capital raised (by founders and investors)
• Ownership details (in the company)
• Roles and responsibilities of each of the co-founders
• Compensation (salary drawn by each of the co-founders)
• Details of exit formality for founders
• Dissolution of the firm
• Details of dispute resolution
• Miscellaneous provisions

Roles & Responsibilities

The clear roles and responsibilities of each founder should be defined. This helps avoid disputes and everyone is aware of their job. Like one of the cofounders may be technology head and you call him CTO and the other founder is finance head, you can call him CFO. To sum up: Your founders’ agreement should describe what the co-founders are called, what they do, and how decisions get made.

Equity Breakdown in Founder Agreement

The co-founders of a business will naturally want to share the business itself—that’s the basic idea behind equity. But how do you divide your company’s equity among its co-founders? Deciding in your founders’ agreement will help you dodge misunderstandings, hurt feelings, and potentially worse.

For example, some co-founders might just want to split the equity evenly between themselves. Others might want to distribute them according to the roles and responsibilities (which we discussed earlier) or according to who fronted the most cash to get the business on its feet.

Maybe you will give a bigger percentage to the person who came up with the idea in the first place, or to the one who coded the first demo or made the first batch.

Vesting Schedule

You’re probably starting to see just how useful a specific founders’ agreement can be by now, huh? By laying out all of these financial details as early as possible, you’ll prevent any serious emergencies that a disagreement down the line might cause.

We can’t talk about equity without talking about vesting: if co-founders got their shares all at once, there would be nothing stopping half of them from hitting the snooze button and letting you do the work. By creating a vesting schedule—often four years with monthly installments—you’re encouraging everyone to earn their keep. Plus, investors will expect a market-typical vesting schedule, and not having one wouldn’t be a great sign.

Treat this section of your founders’ agreement seriously: it can have substantial consequences for your business.

Intellectual Property

Intellectual Property is the creative material that goes into setting your business apart from every other business. That includes your products, recipes, marketing materials, logo, branding, packaging, website, business plan, theme songs, inventions, and more. Needless to say, your intellectual property is important to protect—and the founders’ agreement is a great place to do just that.

First of all, you should make sure that any intellectual property developed for your business goes to the entity itself, not to any particular person. For example, say one of your co-founders comes up with a great new recipe or procedure. If your founders’ agreement states that any intellectual property devised for the business, during work hours, is owned by the business and not any co-founder or employee who came up with it. Ideally, this would never become a problem, but suppose someone decided to break away and form a successful competing business—all because of an invention he came up with while working with you. Protect yourself—and your intellectual property!

Salary

Again, the salary and compensation part of the founders’ agreement is pretty basic—but incredibly important. Noticing the trend? We tend to overlook discussing these fundamentals when the entrepreneurial gears are spinning, but writing up a founders’ agreement forces us to address these topics… And clear up any mismatched expectations everyone could be bringing to the table.

Termination Clauses in Founder Agreement

Finally, a founders’ agreement should go over the circumstances of termination: what happens when a co-founder has been consistently underperforming and needs to be let go?

Remember that while all of these conversations might feel awkward to bring up, they protect every co-founder equally. No one is exempt. The issues dealt with by a founders’ agreement are unfortunately not uncommon, and every good partner will understand the need for this kind of preparation.

That said, termination clauses can definitely be the most stressful topic to make a decision on. What would you want to happen if your co-founder flunked out on you? What would you want to happen if you were underperforming and dragging the business down? Or, alternatively, what happens if someone just wants to leave—for whatever reason they might have? You’ll want to figure out what happens with unvested shares, especially. Often a company will have the opportunity to purchase those shares back from the founder at their original price, but that procedure is in your hands, too. Just setting up a system to deal with termination will go a long way—especially if that termination isn’t a friendly one and attorneys are brought into the picture.

Draft your Founder’s Agreement Online in India with the help of a SettleMyTax.