Putting in place a short, simple agreement between the founders (also known as "founders' agreement") of any startup right from the first day (or, at least, in the initial months) prevents future heartburn. Even if it is an informal set of terms and conditions, it helps to have it written down over an email or paper - this gives a reference point to all stakeholders. At the end of the day, it is a commercial venture that's being undertaken and would result in assets and/or liabilities (in simpler words, profit and / or loss) being created. It is important that these aspects do not come in the way of or spoil relationships, the collective force which is running the startup and holds the potential of making it successful.
Key ingredients of the agreement
The most prominent cause of startup failure is conflict between founders. Every conflict is undesirable, yet conflicts are inevitable. When individuals with diverse backgrounds, visions, and aspirations come together to build a company, disagreements are bound to arise. However, what separates successful startups from those that falter is the presence of a solid foundation—a founders’ agreement. A founders’ agreement serves as a vital framework for resolving disputes, clarifying roles and responsibilities, and establishing a shared vision among the founding team.
In this article, we will explore the importance of a founders’ agreement and how it can mitigate conflicts, enhance collaboration, and ultimately ensure the success of a startup venture.
What is a Founders' Agreement?
A founders' agreement is a crucial document (generally laid down in the form of a legal agreement) that outlines the rights, responsibilities, and obligations of a startup's founders. It serves as a legal contract that establishes a framework for decision-making, ownership, and dispute resolution among the founders. The importance of a founders' agreement cannot be overstated, especially in the early stages of a startup, as it helps mitigate potential conflicts and sets the foundation for a successful and harmonious business venture.
When to do it?
Ideally, the right time would be at the very start of things. When founders have joined hands and come together, they should put some basic understanding into tangible writing. Without getting into hassles (and also because the plan or product or way forward would be far from having shape), at the least, the founders should write down what they've agreed upon this far over an email.
Before the formation of any entity (such as a private limited company), the agreement should desirably be in place. One should not go by the plain-appearance clauses in the memorandum or articles of association because once you sign on them, they (generally) constitute the first understanding between the promoters and the very company that they’re forming – this is removed from reality because the first understanding would not have actually been written down.
If neither of the above has been done, the time prescription is – do it at the earliest.
Key ingredients of the Agreement
The agreement process should start with the identification of the vision. Though it may not expressly be written into the agreement, it is important that the vision of the company and that of the individual founders are identified, discussed, and aligned before one would sit down to draft the agreement. Vision alignment would help identify and iron out any material differences at the outset. It should not be so that one founder aims at a quick windfall exit at the earliest opportunity while the other dreams of a long-term steady-growth stint at the venture.
Once this is in place, the regular and objective features of the Agreement would generally cover the following:
Relationship aspects (or, Agreement clauses) | Questions to ask and answer between the founders |
|---|---|
Commitment | |
Ownership | |
General management of the business | |
Lock-in and exit | |
Closure of the business | |
Dispute resolution | |
Confidentiality, non-compete, and non-solicitation |
If professional assistance is unavailable to draft the agreement, it is still possible to capture the essential elements by documenting them in plain language. While the expertise of advisors and lawyers can provide additional clarity and ensure comprehensive coverage, a simplified agreement can still be effective. By clearly articulating the key terms and expectations, founders can create a tangible agreement that serves as a reference point for their working relationship. A well-drafted founders' agreement, even in plain language, can provide a solid foundation.
Difficult yet worthy conversation!
A founders' agreement is not merely a bureaucratic formality but an indispensable tool for startups. It establishes a solid foundation for collaboration, ownership, and decision-making, ensuring that all founders are on the same page from the very beginning. By clearly defining expectations, obligations, and key aspects such as ownership and intellectual property rights, it minimizes the risk of conflicts and disputes down the line. Moreover, a founder agreement promotes transparency, trust, and accountability among the founding team, enabling them to navigate challenges and make informed decisions together.
While initiating these discussions may be challenging and emotionally difficult, the effort invested in crafting a comprehensive founders' agreement is undoubtedly worthwhile, as it paves the way for long-term success and growth for the startup. By laying the groundwork for a harmonious and well-defined partnership, founders can focus their energy on driving innovation, pursuing opportunities, and achieving their shared vision.
*Authored by Amar Gahlot, Advocate. The views expressed are personal and do not constitute legal opinion. *
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