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Why You Need a Founder's Agreement; Relationship or Not

Posted by Adam Blaier | Jun 26, 2019 | 0Comments

In the initial stages of a startup, co-founders will spend a significant amount of time taking the steps to transform their ideas into reality. Money may be tight, and they may consider skipping the Founder's Agreement, assuming that each partner will uphold your handshake agreement and never leave the company. 

Unfortunately, this is not always the reality. While pre-existing relationships may help with cohesion, a written agreement can help when the cohesion would otherwise come apart under the grueling grind of the startup life. You need a Founder's Agreement to protect your company and your investment.

Why a Founder's Agreement is Essential

A Founder's Agreement is important because it puts everything in writing and is legally binding. A binding agreement helps protect your investment and gives you an initial assessment of your company. Clarifying each co-founder's role in the startup prevents conflicts later and preserves relationships. The agreement should also cover how disputes will be resolved; which is an opportunity to predict future conflicts and brainstorm resolutions. At some point, one co-founder may wish to exit the startup, or you may want to add another partner. The Founder's Agreement should cover these processes.

Having a Founder's Agreement in place shows investors that you are a legitimate business. A Founder's Agreement reduces the risk for investors as it ties up loose ends that could hurt the company in the future. A Founder coming back into the picture when investment occurs, demanding something for their contribution, is an awful situation to be in. The Founder's Agreement may help Investors become more willing to invest in your startup.

What to Include in Your Founder's Agreement

Your Founder's Agreement should start with the basics: the name of each co-founder and your startup. It should also include the details of your industry and the products and/or services that your startup offers. Specifying each co-founder's responsibility in the company helps prevents conflicts later, and helps your startup run efficiently. This also empowers co-founders to make small but important decisions and specifies which decisions are so important that they require a consensus.

Your startup's equity needs to be divided among the co-founders, and the Founder's Agreement can specify who holds what portion of the company. This portion should include a vesting schedule, which is attractive to investors. Salary and other compensation should also be specified.

Intellectual Property (IP) is an important and very valuable piece of your startup, and it needs protection. The Founder's Agreement should specify what IP belongs to your company and what belongs to the creator. Confidentiality agreements, IP assignments, and non-compete clauses should be included here.

Finally, you need an exit strategy. At some point, one co-founder may want to leave, someone may stop being an active participant, or you may all agree to dissolve the company. If one partner wishes to leave or is terminated, your Founder's Agreement needs to address how your company will handle un-vested shares. In termination cases, your startup may need to involve attorneys to protect itself and the remaining partners. The Founder's Agreement will provide both sides with previously agreed-upon information.

Hire an Experienced Startup Attorney

Having a Founder's Agreement in place prevents conflicts and preserves relationships within your startup. It also makes your startup attractive to investors, showing them that you are a legitimate company. An experienced startup attorney can create a strong Founder's Agreement for you.

Call Blaier Law LLC today at (848) 243-1148 or contact us online to learn how we can help your business today.

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