⚖️ Understanding Founders' Agreements

Author

Liam Gill
September 26, 2024

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Practical Information - What is a Founders' Agreement?

A Founders' Agreement is a crucial legal document that outlines the roles, responsibilities, and ownership stakes of each founder in a startup. It serves as a blueprint for how the founders will work together, make decisions, and handle potential conflicts. This agreement typically covers essential aspects such as equity distribution, decision-making processes, intellectual property ownership, and what happens if a founder leaves the company. For startup founders, having a clear and comprehensive Founders' Agreement in place is vital to prevent misunderstandings and ensure that all parties are aligned from the outset.

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Why Every Founder Should Sign One

Every founder should sign a Founders' Agreement as soon as they start working on any project with someone else, even if it’s just a side project. Without this agreement, disagreements over ownership, contributions, or the direction of the project can quickly escalate and jeopardize the entire venture. A Founders' Agreement helps prevent these issues by setting clear expectations and providing a framework for resolving disputes. It also protects the interests of all founders by legally documenting their contributions and stakes in the company, which can be crucial in securing future investments or partnerships.

If the basics, such as equity in your company, are not 100% clear from a legal perspective, this could threaten your chances of raising capital or getting funding from angels, banks, etc.

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Getting Started with a Founders' Agreement

To create an effective Founders' Agreement, startup founders should work closely with a lawyer to tailor the document to their specific needs and circumstances. This agreement should be thorough and cover all potential scenarios, from how decisions are made to what happens if one founder wants to exit the business. Signing a Founders' Agreement early on, even before significant revenue or investments are involved, ensures that all founders are on the same page and helps build a strong foundation for the startup's future success.

If you truly can’t afford any legal advice, do your best to create a document that outlines the intention of all the founders as clearly as possible and have them all sign it. At least having something on paper shows where your minds were when you started working on the business.

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