Important Points to Cover in Your Founders’ Agreement

Sanchit MalikStartup BasicsLeave a Comment

In this blog, I am going to discuss about what Founders’ Agreement is and what are the important points that you must cover in the agreement. Also, I have made a Founders’ Agreement Template which you might find very useful.

Basically, Founders’ Agreement is an agreement amongst the founders of the company which ultimately benefits the founders’ rights and the future of the company. It should be made when the startup is in very early stage. It helps the founders agree on paper on few important terms like functionality of the company, equity, role etc.

The founders’ agreement is a legal binding agreement between the founders of the company. The agreement doesn’t involve any other third party (like investors).

Some of the key points that you must cover in the founders’ agreement are:

Founders Agreement Template

Steve and Woz

Percentage of Shares in the company:

Your founders’ agreement must include clear cut share holding percentage of each founder in the company.

Vesting of Shares:

I will explain this with an example.
For example, you are two founders who have 50-50 shares in the company. It’s been 1 year after the incorporation of the company and you both haven’t done vesting of shares in the company. You have been working really hard to take the company to the next level and one day the other founder decides to quit. If you haven’t done vesting then whatever efforts you put in the future for the company will be earned by him as well. That doesn’t make any sense. That is why vesting is done.

Vesting of shares means that the founders should earn their equity ownership by contributing to the company with their valuable work and efforts for the company.

General Norm of vesting is for 4 years. For first year you have to work for whole year to earn 1/4 of X (X is your % of shares in the company). From second year, founders share should get vested month on month till the end of 4th year of his work.

In case one founder plans to quit within 2 years, then he will only have 2/4*X i.e. half of his shares. Rest of the shares, he will have to transfer back to the company (or to the other founders).

Single Trigger Accelerator:

In case your company gets acquired within 3 years from the start of the company. At that time, only 3/4 of your shares have been vested.

After getting acquired, you lose the control from the company. In that case, the founders must have single trigger accelerator clause in the agreement. That means, at the time of acquisition, all the shares of the founders will get vested and they will earn 100% of their equity ownership in the company.

There’s also double trigger accelerator, which means half of the unvested shares will become vested when the company gets acquired.

Other points to cover in your founders’ agreement are:

Renumeration:
If you have a very good understanding between each other then you need not to mention about what salary the founders will be withdrawing from the company. But, you could mention it as well to have a clear understanding.

Role of the Founders:
Role of each founder is also good to mention in the agreement if there’s not clear understanding between each founder.

Non-Compete, Confidentiality are also important clauses that you should add in the founders’ agreement.

Conclusion:

While I have covered most of the points. Founders’ Agreement changes on the basis of different scenarios. Hope you found this blog useful.

Also, I have made Founders’ Agreement Template which would definitely be very useful for you. It is a sample business contract amongst Founders. You can download it here:

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