Overview of the Founders Agreement
The Founders Agreement is a contract that specifies each founder’s rights and obligations when starting a business, a partnership, or an LLP. Such a contract is comparable to the shareholders agreement used by the company’s shareholders. This agreement specifies the sum invested and the ownership stake. Therefore, any equity or shares granted to the co-founders would be listed in such an agreement.
A founders agreement can result in the following advantages:
- Removes Issues: This type of agreement’s primary advantage is that it eliminates any disagreements between its creators. By referring to this type of agreement, any concerns that may develop in the future would be avoided.
- Roles and Obligations Are Defined: The co-founders’ roles and responsibilities are clearly outlined in the founders agreement. This would help the co-founders understand their respective positions within the organisation or firm.
- Ensures that roles are recorded, including the co-founders’ roles: By referring to this agreement, any type of difficulty about the founder’s role can be avoided.
- Dispute Settlement: A founders agreement must contain a clause addressing dispute resolution. The founders would be able to use dispute resolution procedures including arbitration, mediation, and out-of-court settlement effectively if they had this in writing. The number of court cases would be lowered if this provision was included in the contract.
Mandatory Clauses in Agreement
A founders agreement must have the terms or clauses listed below:
Equity versus Ownership: One of the key provisions of a founders agreement is ownership or equity ownership. Equity ownership in the company would depend on a number of variables, including the amount of investment made, the founders’ experience, intellectual property rights, informational know-how, and networking opportunities. Some of the aforementioned would depend on the extensive experience a founder would bring out.
Co-Founders’ Exit: The departure clause is a crucial provision or factor to take into account in a founders agreement. Such a sentence would specify the exit situation. A termination may result in a voluntary or forcible exit. A formal process or procedure must be offered for such a circumstance. Such a clause, which is negotiated by the founders, is referred to as an exit clause or a vesting agreement.
Responsibilities and roles: The tasks and responsibilities should be clearly stated in the founders’ agreement. The co-founders might divide their various roles in accordance with the needs by using this method. Through this, several people can manage different functions.
Restriction on Share Transfers: A provision addressing the prohibition on the transfer of shares is required. To specify the same connected to the agreement, a lock-in provision is typically present. However, there may be situations where the co-founder would like to leave the company before the lock-in clause expires. The valuation clause must be included in the agreement in order to determine this circumstance. This type of clause must address the valuation and dilution of shares if the co-founder wants to withdraw from the agreement. This Agreement shall also specify the technique of valuation. whether a merchant banker or chartered accountant who is registered with SEBI performed the valuation. The agreement should also specify whether international value standards are being used.
The licencing and assignment of intellectual property: Any intellectual property that was invented or generated by the original owner is protected by those rights. Once the founders agreement is written, it is imperative to transfer intellectual property rights to the company. By doing this, the corporation would acquire ownership of the founders’ intellectual property rights.
Co-founders’ Value Additions: Any additional value or contribution relating to the founder’s intellectual property rights, research and development, or other technical know-how must be included in the founders agreement as a provision. Even though such material is exclusive in nature, the founders agreement must include it. Such details would dispel any concerns about the contribution of the co-founders.
Non-Compete or Non-Compete Clause: Also included in the founders agreement must be a non-compete clause or a contract prohibiting the founders from conducting business. Such a condition must unambiguously prohibit the founders from taking part in any competitive activity while they are employed. In addition, these elements in the founders agreement must comply with the requirements of the Indian Contract Act, 1872. The non-compete clause needs to be acceptable and should only apply for a certain amount of time after the founder’s job has ended.
Confidentiality: Confidentiality would be one of the primary terms of the founders agreement. The founders should additionally sign a nondisclosure agreement, sometimes known as an NDA, after the founders agreement. Information that is private to the parties is included in this agreement. There would be business-related secrets. A particular person may employ the clause connected to breach of provisions in the case of a term breach.
Protection of Data: There must be a clause dealing with data protection if the agreement involves sensitive and private information of stakeholders. This agreement must reflect the principles of the GDPR and the personal data protection statute.
Conditions of Employment: The founders agreement must include information about the separate founders’ employment terms. Additionally, it is essential that the co-founders establish their own employment agreements. This provision will cover the parties’ relative rights, obligations, shareholding, and compensation.
Ability to Make Decisions: The agreement must expressly address the ability to decide and accept responsibility. In addition, the founders must be assigned to several departments. By doing this, the founders’ roles in terms of their capacity for decision-making would be outlined in the contract.
Finance and investment in the future: In the founders agreement, there must be one more provision relating to potential financials. The agreement must specify how future business financing will be provided. If funding is provided in the form of equity or debt, the relevant clause must be included.
Resolution of Conflicts: The founders agreement must include a reference to this provision. The method of resolving any disagreements between the co-founders must be specified. This would avoid wasting time and money on lawsuits. Arbitration, reconciliation, mediation, or other out-of-court mechanisms can be used to resolve disputes.
Termination: The agreement must also contain a provision about its termination. The agreement must also include information on the provisions that apply when the agreement is terminated.