The process of documentation starts before the commencement of business. Every company need some key foundational agreements at this stage. Among these, founder agreement plays an inevitable role. This document is used to formalise the relationship between the founders of a business. Apart from this, having a founder agreement has various benefits. 

What is a Founder Agreement?

A founders agreement is a legal contract between the founders of a company. This document outlines the roles, responsibilities, and rights of each founder in a company. Founder agreements are also known as co-founder agreements. As the name suggests, this document provides a clear roadmap for the founders on various aspects of the business such as making decisions, resolving disputes etc. 

Why is a Founder Agreement Important?

According to a report by Harvard Business Review, startups with a clear founder agreement experience 40% fewer internal conflicts than those without it. Setting up a founder agreement can directly impact your business growth. Some of the main points are listed below:

• Clarity in roles and responsibilities: A founder agreement clearly outlines each founder’s role in the company. Thus it ensures that there is no overlap and gaps in responsibilities. Every founder knows what’s expected of them and they can focus on their tasks.
• Proper equity distribution: The agreement clearly mentions how equity is distributed among the founders. This section is very crucial as it determines each founder’s ownership percentage which will impact future funding and decision-making.
• Conflict resolution: In business, it is common to have disagreements. An effective founder agreement provides a clear framework for resolving conflicts so founders can keep a good relationship with each other.
• Intellectual property rights: The agreement covers who owns the intellectual property created by the founders which is important for protecting the company’s ideas and innovations.
• Vesting schedules: To keep founders committed to the company, the agreement often includes vesting schedules for equity. This means founders earn their shares over time not all upfront.
• Securing investors: Investors look for a solid founder agreement as a sign of an organized and prepared team. A clear agreement shows founders have thought through the key parts of their partnership and are serious about the business which gives investors more confidence and makes it easier to get funding.

Key Components of a Founders Agreement

The following are some of the key components every Founder agreement should have:

1. Roles: This section defines the roles and responsibilities of each founder. It should outline who will be in charge of what (product, marketing, finance etc) and what are the expectations for each role.
2. Ownership: It states how the equity is split between the founders. The percentage of equity each founder holds should be stated in this section. Also, include details regarding the terms for initial investment and future funding rounds that affect equity.
3. Vesting: Set a vesting schedule for equity shares to encourage long-term commitment. This often involves a period over which shares are earned. Generally, founders earn their shares gradually not all at once.
4. IP: Defines the ownership of intellectual property created by the founders (patents, trademarks, copyrights). Make sure the agreement covers how these assets will be managed and protected.
5. Decision-making: This section outlines the process for making big decisions. This could be voting rights, decision thresholds and procedures for resolving disputes to ensure good governance.
6. Exit: The section deals with the terms and conditions for a founder leaving the company. It provides a clear idea about how their equity will be managed and details regarding buyout provisions.
7. Dispute resolution: This section states a clear process for resolving founder disputes. This could be mediation or arbitration to resolve disagreements.
8. Confidentiality and Non-Compete: These are clauses to protect company confidential information and prevent founders from working for competing companies. This section ensures sensitive business info remains safe and founders don’t directly compete with the company.