Founder Agreements guide the founding team in the long term
October 8, 2019
Clearly defining roles for the founding team is crucial for maintaining structure and productivity. Founder agreements help guide a founding team and serves as a helpful tool in times of disagreement.
Starting a business is thrilling. Entrepreneurs have the opportunity to experience what it feels like to turn your vision into a reality.
Why founder agreements are helpful?
The freedom to work within your own parameters and to move the company in the direction that you want is liberating.
But taking a step back to set rules for both yourself and cofounders is necessary.
Above all people still need to operate at a certain level and maintain their performance. Otherwise resources will be wasted and the growth that you want won’t become obtainable.
That’s why founder agreements are helpful. Because they clarify what everyone’s responsibilities are and give much needed structure. Consequently, the dynamic between compatible cofounders is only enhanced with this guidance.
Why founder agreements are important?
While the gist of a founder agreement is a set of rules that founders agree upon at the beginning of the company, there are more aspects that it covers.
First and foremost, it defines expectations for everyone in the founding team. More precisely, this holds everyone accountable for their performance and prevents anyone who is underperforming from taking advantage of the situation.
It also should cover any exit plans for someone who is underperforming or if someone wants to voluntarily leave the company. However, exit plans are much more complicated than some expect.
People can’t simply terminate others or just leave. In fact, there is a considerable amount of legalities involved in exits. Thus, a founder agreement will cover any potential problems in this regard. While founders may not anticipate these things in the beginning, it’s wise to still prepare for them.
6 key topics to put in a founder agreement
Some individuals may be partially involved and may expect a certain amount of compensation. So if there is a legal dispute, it’s very helpful to have a founder agreement that states who is genuinely part of the company.
2. Company goals
The founding team should all have relatively aligned visions but will always need some guidance. That is to say, having the company goals to look back to in times of decisions helps the company stay on track.
3. Everyone’s rights
Many disagreements can sprout from arguments about everyone’s entitlements. Thus, there shouldn’t be any grey areas when it comes to rights as some people can abuse this.
4. Equity distribution
Diving the company amongst founders can be tricky. There’s no one right way to approach this. Someone who fronted a lot of cash at the beginning may be feel entitled to a higher stake in the company. Similarly, founders who brought unique skills that proved to be vital to the company’s growth may also expect a higher stake. Regardless, we advise to not give away high percentage of the company at the beginning, as well as avoid the 50/50 split.
Saving a portion serves as :
- a reserve to ensure the cofounders commitments,
- a reserve for the next rounds,
- an emergency reserve should you need it.
5. Vesting agreement
Defining benefits incentivizes workers to keep working and to not begin to slack. These benefits are typically given through monthly installments. Similar to equity distribution, settling on an appropriate amount for vesting agreements can be a challenge.
6. Exit Plans
An important factor in comprehensive founder agreements. This avoids any messy fallouts that occur.
It isn’t necessary but bringing a lawyer on board can be a good idea. Founder agreements are definitely another thing worth investing the time in for founders. Indeed, they not only help provide much needed structure to companies but also help protect founders from unfortunate situations. Also, it can be difficult at times to discuss some aspects of a founder agreement with cofounders but it’s important to be thorough and comprehensive. Therefore, founder agreements are absolutely necessary for founding teams so that they keep the vision to.
By Bryan Cho, IdeasVoice USA
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