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. The agreement also simultaneously creates a framework that allows the startup to remain strong as it grows into a profitable business. Beyond establishing who the founders are and their roles, there are several reasons why startups should have a Founders’ Agreement.

Aligning the Vision

In the early stages of a startup, it is common for a founder to get caught up in the excitement of being an entrepreneur.  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 easy to dismiss minor disagreements so you can focus on reaching the finish line.  Unfortunately, disagreements between co-founders may signify that one or more partners have a different vision or purpose for the startup.

Founders must share the same vision and purpose for the company.  It is imperative to formulate a Founders’ Agreement that outlines the company’s foundation and the “who, what, when, where, why, and how” of business operations. A comprehensive agreement may be effective at keeping everyone aligned with the same vision.

Establishing the Startup Culture

After successfully laying out the company’s aspirational and philosophical foundation, the founders must also determine the type of working environment and brand culture that will complement the company’s vision.

As exhaustive as this may seem, agreeing on brand culture and putting working environment preferences on the table can help founders understand how best they can work together. A successful Founders’ Agreement can establish an ideal work environment and company attitude to provide long-term and short-term benefits.

Equity Considerations

Many founders assume that the easiest and most obvious route to equity distributions is to divide it equally between them. However, when the founders precisely identify each founder’s value, an equal share may not equate to a fair share.

Equity shares should center on a founder’s contribution to the company.  The founder who formulated the original concept may receive a larger share of the equity. Founders who support the startup with a full-time commitment may also be entitled to a greater equity share.  

Outlining equity shares from the outset via a Founders’ Agreement ensures the front-end handling of equity discussions and considerations. Although this may not wholly alleviate disagreements, it can prevent a potential disaster for the startup should a conflict arise. There is no right or wrong approach to dividing equity between founders, as long as the division is agreed upon by everyone. However, putting the agreement in writing promotes transparency and reduces misunderstanding.

Intellectual Property Ownership

As co-founders build and develop their business plan, product, or technology platform, they create 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 vital to ensure that the intellectual property developed for the company belongs to the company and not to the individual who created it.  Otherwise, if that person leaves the company, they can legally take the intellectual property with them, which can devastate a 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 company’s intellectual property.

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.