The Perfect Founders’ Agreement for Startups
A Founders’ Agreement is a contract that governs the business relationship between a startup’s founders. The Founders’ Agreement defines the rights, responsibilities, and obligations of each founder and simultaneously creates the framework that allows the startup to remain strong as it grows into a profitable business. Beyond establishing who the founders are and everyone’s roles, there are several reasons why startups should have a Founders’ Agreement.
Aligning the Vision
In the beginning stages of a startup, it is very easy to get caught up in the excitement of the entrepreneur journey. When you have a strong business concept and a business partner who is willing to put in the sweat equity to grow the company, it is also easy to dismiss minor disagreements so you can focus on getting to the finish line. Unfortunately, disagreements between cofounders may signify that one or more partners has a different vision or purpose for the startup.
It is imperative for founders to share the same vision and purpose for the company. Formulating a Founders’ Agreement that outlines the company’s foundation, along with the “who, what, when, where, why, and how” of the business operations, may prove effective for keeping everyone aligned with the same vision.
Establishing the Startup Culture
After successfully laying out the aspirational and philosophical foundation for the company, founders must also determine the type of working environment and brand culture that will complement the vision of the company.
As exhaustive as this might feel at first, agreeing on the brand culture and putting working environment preferences on the table can help founders understand how they can best work together. A successful Founders’ Agreement can establish ideal working conditions and company attitude to benefit the company in both the short and the long term.
Many founders assume that the easiest and most obvious route to equity distributions is to divide it equally between the founders. However, when the founders clearly identify the value each founder brings to the company, an equal share may not add up to a fair share.
Equity shares should be based on a founder’s contribution to the company. The founder who brings the original concept to the table may receive a larger share of equity. Founders who support the startup with a full-time commitment may also be entitled to a greater share of equity.
Outlining equity shares from the outset through a Founders’ Agreement ensures that all equity discussions and considerations are handled on the front end. Although this may not completely alleviate disagreements, it can prevent potential disaster for the startup should a conflict arise. There is no right or wrong approach to splitting up equity between founders, as long as the division is something that everyone can agree with. Putting it in writing helps.
Intellectual Property Ownership
As co-founders build and develop their business plan, product, or technology platform, they are creating intellectual property. Employees, contractors, and consultants who develop technology or business processes for the company are also creating intellectual property. Whether it is a trademark, a patentable invention, or a trade secret, it is important to make sure that the intellectual property that is being developed for the company belongs to the company and not to the individual who developed it. Otherwise, if that person leaves the company they can take the intellectual property with them which will be devastating for the company’s business structure and bottom line. A Founders’ Agreement that addresses intellectual property can eliminate confusion over who owns the intellectual property rights and the procedures for assigning the intellectual property to the company.
Working with IPS Legal Group, P.A.
IPS Legal Group, P.A. wants to help ensure that you and your partners have the greatest chance at success. The best way to accomplish this is by starting with a Founders’ Agreement. For more information on establishing a successful Founders’ Agreement, contact the legal team at IPS Legal Group, P.A. to schedule a free consultation.
Disclaimer: This blog is not intended to be a substitute for legal advice or instruction. Every legal question calls for a different legal answer, and the above might not be applicable to your situation. Contact IPS Legal Group, P.A. today to discuss your business needs.