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Why is Founders Agreement Required?

Narendra Kumar

| Updated: Dec 28, 2017 | Category: Finance & Accounting

Founder’s agreement

Founder’s agreement can be clearly defined as follows:

“A clear agreement between founders on a number of key issues that their business   might face.”

One of the most important things every startup overlook is a Founder’s Agreement. As the business is usually the result of two or more like-minded people so it is necessary to keep everything precise. As it is extremely important to outline the rights and the duties as this will help in decision making and will reduce the risks. It will also help in avoiding any kind of eventual dispute between founders.

A properly drafted founder’s agreement would ideally have clauses regarding rights, responsibilities, goals, broad vision of the companies, IP assignment, and anything that the co-founder wants to settle before the business takes place. It should also carry a clause for what if one founder decides to leave the company in middle.

It is also important to identify the person who will make the major decisions and should be highlighted in the agreement. It should also highlight the rights of each member, and steps to be taken in case of disagreement between them.

As it is not necessary that each founder has the same contribution in respect of time or money. Therefore it is of utmost important the agreement should contain a clause on equity ownership. The best agreement is that which include the multi-year vesting so that the founder’s success is aligned with the company.

Why Founder’s Agreement is Required?

It does not matter that how you and your co-founder say that what you people feel about each other, the reality can only be found when the words come to actions.

Many things can happen while splitting: one of you may leave while keeping the equity, the skills and the motivation for work may not be what you thought or some people might over-deliver while the others may underperform.

That’s what co-founder agreements are for. These contracts stipulate your roles and responsibilities and penalties for not delivering. It’s not a paper to fire your co-founder and a friend – it is a document that ensures you won’t have to waste your energy worrying about anyone else other than you.

There are many situations that may arise and cause conflicts. Make sure that you thoroughly and openly discuss all possibilities before you start. Be as open and direct as possible, at the end of the day everything is at stake: your company, your money and the time of your life. Talk openly about whatever issues each of you believes should be on the table.  And most importantly, leave no stone unturned.

If a Founder’s Agreement can’t make your business successful it can surely save you from failure.

An agreement should also contain the detailed provision regarding the IP so that it will prevent any of the co-founders from taking mission-critical technology with him during a sudden exit.

All the legal agreement should be once checked by the legal expert before signing the agreement. All the omissions and ambiguities will pave the way for a successful company.

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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