Founders' Agreements – why it matters
Developing your business without a Founders' Agreement could
mean major problems in the future if you run into an issue that hasn’t been
agreed from the outset.
In the initial stages of your business, when getting this off the ground – it’s vital to have a clear agreement with your co-founders about the key issues that will achieve the business's objectives. The friendlier you are with your co-founders, the easier it may be to skirt over having documented clearly what you expect one another to give to the business, rather than just assuming you want the business to head in the same direction.
While this process may be time consuming and possibly involve some heated discussions, once it's finished, you can all move forward knowing that you have one of the necessary foundations to build your business on.
The difference – founders' agreement vs shareholders' agreement
There is often a lot of confusion between these agreements, and at what stage in your business, you should have such an agreement, and sometimes the terms are used interchangeably.
A founders’ agreement seeks to establish the basics of the business such as the roles and responsibilities of the founding team, equity ownership and vesting, and IP ownership.
A founders’ agreement is simply a form of shareholders’ agreement used at the initial stage and will usually replaced by a shareholders’ agreement when the business takes on more shareholders.
Remember when you register your company you'll also need:
- a ‘memorandum of association’ - a legal statement signed by all initial shareholders agreeing to form the company
- ‘articles of association’ – the written rules about running the company. [The articles are a contract between the members and the company but I think all we need to say is that they set out how a company is to be run. Note also that private companies need not have a company secretary]
The benefits of having the agreement in place include:
- Aligns expectations – expectations are everything! Having a Founders' Agreement in place is a good opportunity to speak frankly to your co-founders at an early stage about the specific matters underpinning how the business is to be run.
- Harder to resolve future potential issues if you don’t have an agreement in place. If you find yourself in disagreement, you want to be able point to the relevant part of the agreement dealing with that matter rather fighting it out which will likely spell bad news for you and the business.
- Good governance / best practice - even though company law is in place, it's best to set out roles and responsibilities at the onset
The content of each Founders' Agreement will vary considerably as it details issues that are unique to the start-up concerned.
Three fundamental issues you should consider in your agreement are:
- Roles and responsibilities – it is obviously important for a co-founding team to collaborate but it doesn't mean that everyone should be in charge of everything. Think about what the business will need and match your skills to the requirements of the business. Do you need any external advice if you or your co-founders don't have the necessary skills for your start-up? Do all decisions need to be made by consensus or will this slow the business down?
- Time – it is important to establish what time commitment each of you is expected to make and how a value is put on that time. Are you all working on the business full-time or part-time? Are there a minimum number of hours per week you should all investing the business?
- Equity and vesting – you will need to think about the allocation of ownership of the business amongst the co-founders. This can be a delicate topic and it is essential that you agree how the equity will be divided to make sure there is absolute clarity about who will get what when the business launches. Not all co-founders necessarily need to take exactly the same share. Again, you should think about the value that is attached to the work each founder is putting in.
Finally when signed, sealed and in operation… don't just let this gather dust at the bottom of a filing cabinet. Make sure you use it to operate your business!
Please contact the Trowers’ team for more information. We have also produced a series of fact sheets to help you, so click here to access our online resources.