Founders' Agreement

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Founders' Agreement

Founders’/Co-founders’ agreement is a contract between the founders of any new company. It is a very important document for any startup. It outlines the responsibilities of each founder. It also helps to set the objectives and goals of the business. It highlights the roles the founders will play.

PocketLawyer is India's leading platform for Business Agreements drafting. We do not believe in using boilerplate templates. We understands that no two founders’ agreement is the same and aims to draft each such agreement keeping in mind the needs of the client. In addition to Founders' Agreement, PocketLawyer can also help you with drafting of Website Terms and Conditions, Joint Venture Agreement, Shareholders Agreement, Non-Disclosure Agreement, Vendor Agreement, and more.

Why is it used?

  1. To allocate duties and responsibilities.
  2. For proper utilisation of resources.
  3. To identify future hurdles and try and solve them.

What are its benefits? Is it enforceable?

  1. It clarifies the roles of each founder.
  2. It lays down responsibilities.
  3. Helps prevent future ambiguity.

The founders’ agreement is a precursor to all other startup documents. It acts as a practice-run for the Articles of Association, shareholders’ agreement etc. It is enforceable like any other contract. For it to be binding under the Companies Act, however, it must be incorporated into the Articles of Association. Its enforceability is similar to a shareholders’ agreement.

When should this agreement be drafted?

A common query is at what stage a founders’ agreement should be opted for. There is no right answer as it differs from one situation to another. The agreement may be drafted at the ideation stage, i.e., prior to incorporation. It may be entered into after incorporation as well.

However, it is important that such an agreement be executed before investors are approached. Once investors enter the picture, if there is no founders’ agreement, disputes regarding roles of the founders may arise.

Drafting a founders’ agreement

Given below are the important clauses that should be present in this agreement.

  1. Parties: Who are the founders? What are their posts? The agreement should answer these questions.
  2. Owning equity: The agreement should lay down the share of equity that each founder owns.
  3. Milestones: The agreement should lay down objectives as well as milestones that it should reach. These could be with regards to investment, shareholding, etc.
  4. Board structure: Before investors are approached, a board structure should be agreed on. This should also include voting procedure, quorum etc.
  5. Transfer Restrictions: What happens if a founder wants to sell his stake in the company? What rights do he and the other founders have in this situation? The agreement should answer these questions.
  6. Intellectual Property: Who owns the IP of the business? Who can it be assigned to? When founders start a business, they are also creating intellectual property. A clause to protect the same must be added to the founders’ agreement.
  7. Dispute Resolution: What court/tribunal should be approached in case of dispute? The agreement should law down the laws that apply to the contract. It should also lay down the correct jurisdiction to approach for disputes. 

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