The founder agreement is essential for entrepreneurs embarking on a new business venture. This pre-incorporation document addresses many important issues including founder contribution, ownership rights, and management duties of an emerging company.
The founder agreement is essentially a contract that’s signed by each founder. The terms of the agreement will vary depending on the nature of the company, but its general purpose is to outline the founder’s interests and expectations in a written document. Some people view these as a prenuptial agreement for co-founders, thus drafting it can be a delicate situation. It’s necessary, however, to have a candid appraisal of each person’s contribution whether you’re partnering with your best friend or someone you just met.
The following list provides a brief description of common founder agreement clauses. Keep in mind that there isn’t a standard founder agreement. Some attorneys include IP transfer clauses, non-compete clauses, and other lengthy clauses that are often drafted as separate documents.
Common Founders agreements clauses
- Introductory Clause: Identification of company, identification of founders, description of company goals, purpose of company formation, etc.
- Capital Contributions: Describes each founder’s monetary investment in the company.
- Capital Distributions: Explains how profits will be distributed.
- Company Ownership: Explains how ownership rights will be divided and documented.
- Vesting: Founders of a startup typically want ownership interests to vest according to a predetermined schedule (normally about 4 years). This provides an incentive for the founders to perform since they’re required to earn their ownership interest over time. If a founder leaves or is removed from the company the unvested shares are generally subject to the company’s buyback right.
- Transfer Restrictions: Founders of a small company generally choose to start a venture together because each person offers a unique skill set. Therefore, transfer restrictions on ownership rights are common.
- Confidentiality: Prohibits founders from disclosing any sensitive company information.
- Non-compete: Prohibits founders from working for a similar company within a certain period of time after departure from the business venture.
- IP Transfer: Assigns intellectual property rights created by the founders to the company.
- Founder Resignation and Removal: Outlines procedures for a founder leaving the company.
- Dispute Resolution: Choice of law, arbitration, and formal procedures for handling a dispute.
- Dissolution: Procedures for wrapping up the business venture.
How to Draft a founder agreement
An experienced lawyer can be helpful at drafting a founder agreement for several reasons. First, you want someone who will create an agreement that includes all of the necessary provisions. There is no one-size-fits-all founder agreement, so it helps to have someone familiar with your industry and familiar with the law of your state. Involving a neutral third-party also helps to create an unbiased agreement that is fair to each founder. Lastly, your lawyer can help you plan for various contingencies. Founder relationships and company goals will inevitably change over time, so be smart and plan accordingly.