INTRODUCTION
A Founder Agreement is an essential contract that the founders of a company created to establish clear guidelines and regulations for their business relationships. It serves as a binding document that outlines the rights, responsibilities, liabilities, and obligations of each founder involved in the venture. The agreement covers various aspects that may not be addressed in the company’s operating agreement, ensuring that all founders are in agreement regarding the fundamental structure of the business and how they will work together to drive its success.
Startups often operate in a dynamic and uncertain environment, making it crucial to address key issues upfront. Having a Founder’s Agreement is highly recommended for startups. It helps establish a clear framework and understanding among the founders regarding various aspects of their business.
The Founder Agreement addresses the division of equity among the founders and determines how much ownership each founder has in the company and outlines the terms of vesting, which specifies when and how founders’ equity stakes are earned over time. This is crucial for ensuring fairness and aligning the interests of the founders. By having a Founder Agreement in place, the risk of potential legal disputes arising from disagreements over business ownership can be minimized, as it provides a solid foundation and reference point for resolving any conflicts that may arise.
Team YLCC brings you the best practices for creating a comprehensive Founders’ Agreement. Let’s get started!
THE KEY CLAUSES OF THE FOUNDER’S AGREEMENT
Equity Ownership and Vesting Clause
The Equity Ownership and Vesting clause in a Founder’s Agreement addresses how the ownership of the startup will be distributed among the founders and outlines the vesting schedule for their equity.
The key points to remember:
- Equity Ownership: This clause specifies the percentage of equity that each founder initially holds in the company. It determines the founders’ respective ownership stakes based on factors such as their contributions, investment amounts, or agreed-upon terms.
- Vesting Schedule: The vesting schedule determines how the founders’ equity will be earned over time. It ensures that founders’ shares are subject to a certain period or specific milestones before they fully own their equity. Vesting helps align the interests of the founders and incentivizes them to remain committed to the startup’s long-term success.
- Cliff Period: The vesting schedule may include a cliff period during which no equity is earned. It is a predetermined duration, often around one year, where founders must remain with the company before their equity begins to vest. This protects the startup from a founder leaving shortly after the company’s inception.
- Vesting Triggers: Vesting triggers are events or milestones that activate the vesting of equity. Common triggers include the passage of time (e.g., monthly or yearly vesting) or the achievement of specific goals (e.g., product development milestones, revenue targets).
- Accelerated Vesting: The agreement may outline provisions for accelerated vesting in certain circumstances, such as a founder’s death, disability, or acquisition of the startup. This ensures that in such scenarios, the founder’s equity is vested more quickly or in its entirety.
Founder Responsibilities and Obligations Clause
This clause in a Founder’s Agreement outlines the specific duties, obligations, and areas of responsibility assigned to each founder within the startup. This clause helps establish clarity and accountability among the founders and promotes effective collaboration.
The key points to remember:
- Defined Roles: The clause identifies and defines the roles that each founder will undertake within the startup. This may include positions such as CEO, CTO, CFO, or other key roles based on the startup’s needs and the founders’ expertise.
- Division of Responsibilities: The clause delineates the specific areas of responsibility assigned to each founder, which includes tasks, functions, or departments for which they will be primarily responsible. It clarifies who will handle operations, finance, marketing, product development, or any other key aspects of the business.
- Decision-Making Authority: The clause addresses decision-making authority within the startup and outlines the decision-making process, whether it involves consensus, voting rights, or assigning decision-making power to specific roles.
- Delegation and Collaboration: The clause may include provisions for delegation and collaboration among the founders and outlines the ability to delegate tasks, seek input, and collaborate on cross-functional initiatives. This encourages teamwork and ensures a coordinated approach to achieving the startup’s goals.
- Communication and Reporting: The clause may establish expectations for communication and reporting among the founders. It defines how regular updates, progress reports, or meetings will be conducted to ensure transparency and accountability among the founders.
Ownership and Transfer of IP Clause
This clause is vital for startups to safeguard their Intellectual Property Assets and ensure that the company has the necessary rights and control over its valuable intellectual property. This clause addresses the ownership and transfer of Intellectual Property Rights (IPR) from the founders to the startup.
The key points to remember:
- Ownership: The clause may states that any IP developed, created, or contributed by the founders in the course of their work for the startup will be owned by the startup itself. It ensures that the startup retains exclusive ownership of all IP assets necessary for its operations and future growth.
- Assignment of IP Rights: The clause establishes that the founders agree to assign, transfer, or convey their rights, title, and interest in any IP to the startup. This includes patents, trademarks, copyrights, trade secrets, inventions, software code, designs, and any other forms of IP created by the founders.
- Present and Future IP: The clause shall cover both existing IPs that the founders bring to the startup and future IPs developed during their tenure. It ensures that any IP created by the founders within the scope of their work for the startup automatically becomes the property of the startup.
- Cooperation and Assistance: The clause may include provisions requiring the founders to cooperate and provide assistance in perfecting and protecting the assigned IP. This may involve signing additional documents, providing necessary information, or taking other actions to secure and enforce the startup’s IP rights.
- Exclusions and Reservations: The clause may also include any exclusions or reservations related to the IP assignment. For example, it could specify that certain pre-existing IP owned by the founders remains their personal property and is not assigned to the startup.
Non-Compete and Non-Disclosure Clause
This clause is a vital component of a Founder’s Agreement that addresses the protection of confidential information and restricts founders from engaging in activities that could be detrimental to the startup.
The key points to remember:
- Non-Disclosure: The clause ensures that founder(s) agree to keep all confidential information of the startup confidential and not disclose it to any third parties. It covers proprietary information, trade secrets, business strategies, customer data, financial information, and any other sensitive information that the startup considers confidential.
- Non-Compete: The Non-Compete portion of the clause restricts founder(s) from directly or indirectly competing with the startup during and after their involvement with the company. It typically specifies a geographic area and period within which the founder is prohibited from engaging in similar activities that could directly compete with the startup’s business.
- Duration of Non-Compete: The clause states the duration for which the non-compete restrictions apply. This period can vary but is typically reasonable and takes into account factors such as the nature of the startup’s industry, the time required for the startup to establish itself, and any potential investment made in the founder.
- Scope of Restrictions: The clause may define the specific activities or actions that are considered competitive and prohibited. It may include provisions prohibiting founders from starting a competing business, joining or working for a competitor, soliciting the startup’s employees or customers, or using the startup’s confidential information for competitive purposes.
- Remedies for Breach: The clause may outline the potential remedies in the event of a breach, such as injunctive relief, monetary damages, or other appropriate legal remedies that the startup may seek to enforce the non-compete and non-disclosure obligations.
The Exit Strategy and Buyout Clause
This clause addresses the process and terms for the founders to exit or sell their interests in the startups and provides a framework for potential scenarios where a founder wishes to leave the company or when the startup undergoes a buyout.
The key points to remember:
- Exit Options: This clause outlines the available exit options for the founders. It may include provisions for voluntary exits, such as selling their equity to the remaining founders or the company itself, as well as involuntary exits, such as in the event of a founder’s death, disability, or breach of the agreement.
- Buyout Mechanism: The clause defines the process and mechanism for conducting a buyout. It covers aspects such as the valuation of the founder’s equity, the payment terms, and any specific conditions or restrictions on the buyout.
- Valuation Methodology: The clause specifies the method or formula for valuing the founder’s equity in the event of an exit or buyout. This can be based on factors like the fair market value, book value, or agreed-upon valuation method determined during the agreement’s drafting.
- Right of First Refusal: The clause may include a right of first refusal provision, allowing the remaining founders or the company to purchase the departing founder’s equity before it is offered to external parties. This provision helps maintain control and continuity within the startup.
- Non-Compete and Non-Disclosure Obligations: The clause may include non-compete and non-disclosure provisions that continue to apply even after the founder’s exit or buyout. This ensures that the departing founder does not engage in activities that could harm the startup or disclose confidential information.
- Payment Terms and Timelines: The clause addresses the payment terms and timelines for the buyout, including whether the payment will be made in a lump sum or instalments and the timeframe within which the payment should be completed.
- Dispute Resolution: The clause may include provisions for resolving any disputes that may arise during the exit or buyout process. It can specify the preferred method of dispute resolution, such as mediation or arbitration.
CONCLUSION
A well-drafted Founders’ Agreement is essential for startups as it provides a clear framework for the business relationships among the founders. Key clauses to include in the agreement cover equity ownership and vesting, founder responsibilities, IP assignment, non-compete and non-disclosure, and exit strategies, among others. These clauses ensure fairness, protect intellectual property, maintain confidentiality, and establish guidelines for future growth and potential exits. Seeking legal advice is crucial to customize the agreement to the specific needs and circumstances of the startup and its founders.
Disclaimer: This article is for information purposes only. You are advised to consult a legal professional for drafting such crucial documents for your business.
This article has been written by Team YLCC. For any other queries, reach out to us at: queries.ylcc@gmail.com
