What is a Founders’ Agreement?
A Founders’ Agreement is a set of obligations company founders have to each other and the company, detailing their roles, responsibilities, salary, equity compensation and more.
When do you need a Founders’ Agreement?
We don’t think that you can ever be “too early” to sign a Founders’ Agreement. At the very least it will prompt you and your fellow co-founders to have an open conversation about how you are thinking about your company and how it should be run and owned.
In the early days of a company you are starting off with a clean slate and we think the best mantra in business is CLARITY, CLARITY, CLARITY.
In our experience, problems very rarely result from the nature of the way a business is set up or run, but when there is confusion and or misaligned understanding between founders.
Why don’t I just do a Shareholders’ Agreement?
You may have read our post about SHAs here in which we preach the importance of setting these up. We still think they are important, but essentially they can wait for a bit until you have investors on board. Those investors are going to have their own views about what they want included, many of which are unique to their institutions.
In the meantime, if you have a Founders’ Agreement in place then you can wait until finalising your seed round before thinking about an SHA.
Who needs to sign?
All company founders should sign one, including the original founder(s), and any new co-founders when they join.
The latter scenario can be taken care of with the new founder signing a quick and simple deed of adherence (also available from LawSimple).
What should a Founders’ Agreement include?
1. Roles and responsibilities to the Company
This should Include some background on day-to-day tasks and whether they’re also a director of the company (see our blog post here on the additional duties that arise from being a director).
In our view it is also really important for all of the founders to set out what (if any) other business interests they have. This is a very typical provision as we often see startup founders balancing a number of commitments, especially in the early days when the success of the business is far from certain.
Did we mention that we think clarity should be the name of the game?
2. Salary and how you work
You can think of the Founders Agreement as an employment agreement between founders and ‘the company’.
Our standard form document therefore includes provisions on holiday days, how sick leave is handled and details regarding notice period (among many more).
3. Equity and how it vests
Founders usually (and in our opinion should) own a substantial percent of the company as shares. Indeed, giving away too much of your equity too soon can be an investment killer further down the line (as VCs will not be able to make enough money on their investment to both (see here for more discussion)).
If a founder joins later on, after the initial shares have been created and allocated, that founder may be given share options instead of shares. You can read our post about share options here, but in short the person that holds the option has the right (but not the obligation) to purchase the shares at a certain time and for a certain price.
You can specify in your Founders’ Agreement whether you’d like to allocate shares or share Options to the founder, and you can create an optional share vesting schedule to allocate those shares or options over a period of time, or when certain milestones are reached.
There are a number of ways you can think about vesting and we have done another post discussing those here. It is essential for co-founders to think about this early as it is a key tool to prevent a co-founder leaving the company before they have contributed to its growth and keeping hold of a large amount of company equity. This will leave very little to give to future investors and will really restrict your ability to get new capital in going forward.
4. Founder restrictions
Founders’ agreements should include restrictions on whether the founders can start or work for a competing business, and if there are any restrictions, how long those should last.
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