Why Your Startup Needs a Founders' Agreement
Starting a new business is an exciting endeavour, but it can also be a complicated and daunting task. As an entrepreneur or a startup founder, you have to deal with countless legal and financial issues, including choosing the right business structure, forming a legal entity, registering with the relevant authorities, and creating a business plan. One crucial step that you don’t want to overlook is getting a founders’ agreement in place. In this note, we’ll explain what a founders’ agreement is, why you need one, and how they can help set you up for success.
What is a founders’ agreement?
A founders’ agreement is a legally binding document that outlines the rights, responsibilities, and obligations of the business owners. It’s typically created at the early stages of the startup, ideally before the company starts operating, hires employees, or raises capital. At this point, the founders are usually still on good terms, and it’s easier to negotiate and agree on the terms of the agreement. Waiting too long to get a founders’ agreement can create uncertainty, confusion, and disagreements down the road.
What provisions to include
A founders’ agreement should cover a range of issues that could impact the business’s long-term success, including:
the roles and responsibilities of each founder
the decision-making process
It should also address how the company will handle issues such as the death, disability, or departure of one of the founders, how disputes will be resolved, and how someone can sell their shares in the company. Each founders’ agreement is unique to the needs and goals of the startup, so it’s important to work with a lawyer to ensure that the agreement is comprehensive and enforceable.
Common problems that arise between founders
Even the most well-intentioned and committed founders can encounter disputes or disagreements over time. Some common issues that can arise include differences in vision or strategy, allegations of unfair treatment or mismanagement, competing interests or priorities, and personal conflicts. Without an agreement in place, these disagreements can lead to legal battles, financial losses, and even the demise of the business.
How a founders’ agreement can help
A founders’ agreement can help avoid, mitigate, or resolve these disputes by providing a clear and mutually agreed-upon framework for how the business will operate, how decisions will be made, and how conflicts will be resolved. It can also help protect the interests and investments of all founders by establishing ownership percentages, vesting schedules, and equity grants. Furthermore, a founders’ agreement can demonstrate to potential investors or partners that the startup is well-managed, organized, and committed to its goals.
The role of a lawyer in preparing a founders’ agreement
While it’s possible to create a founders’ agreement on your own using templates or online resources, we strongly recommend working with a lawyer. An experienced lawyer can help you identify and address potential legal issues that you may not have considered, ensure that the agreement complies with applicable laws and regulations, and provide guidance on best practices for structuring the agreement. Moreover, having a lawyer involved in the process can help build trust and goodwill among the founders, and reduce the likelihood of disputes down the road.
Get set for success
A founders’ agreement is a critical component of any startup’s success. It can help protect the interests of the founders, provide a clear and transparent framework for how the business will operate, and help avoid or resolve disputes down the road. At Support Legal, we encourage all startups to get a founders’ agreement in place as soon as possible, and to work with our specialists to ensure that the agreement is tailored to their unique needs and goals. With a strong founders’ agreement in place, you can focus on building your business and achieving long-term success.
This material is provided for general information only. It does not constitute legal or other professional advice.
For more information, contact Jamie Tredgold, Manging Partner at Support Legal.