A founders agreement is a contract or agreement between the co-founders of the business which contains their respective rights and liabilities. It is an agreement between the founders of the company. All the rights, duties, liabilities, ownership, responsibilities and disputes would be present in a founders agreement. Such agreement would be governed by the provisions of the Indian Contract Act, 1872 or any other law. It is crucial to draft this agreement to determine the rights and liabilities of the parties.
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Founders Agreement- An Overview
An agreement which governs the respective rights and liabilities of the founders of a start-up or a partnership or a LLP is known as the Founders Agreement. Such an agreement is similar to the shareholders agreement which is utilised the shareholders of the company. The amount of investment and ownership percentage is recorded in this agreement. Hence any form of shares or equity which is provided to the co-founders would also be recorded in such an agreement.
Benefits of Founders Agreement
One of the main features of this form of agreement is that any forms of issues between the founders of the agreement are removed. Through this any issues which arise in the future would be avoided by referring this form of agreement.
Ensures Roles are recorded
Roles of the co founders are recorded. Through this any form of issue related to the role of the founder can be avoided by referring this agreement.
Provides Roles and Responsibilities
The founders agreement provides well defined roles and responsibilities to the co founders. Through this the co founders would know their roles and responsibilities with respect to the company or the business.
would be dispute resolution. By having this in writing the founders would be able to effectively utilise systems of dispute resolution such as arbitration, mediation and out of court settlement. Having this clause in the agreement would also reduce the amount of litigation in courts.
Key Terminologies or Clauses Present in a Founders Agreement
Ownership or Equity Ownership-
Ownership or equity ownership is one of the most important clauses present in a founders agreement. Equity ownership in the business would be dependent on number of factors such as the amount of investment in the firm, experience of the founders, intellectual property rights, know-how of information and the networking opportunities available. Some of the above would depend on the considerable experience brought out by a founder.
Exit of Co-Founders-
Another important clause or consideration in a founders agreement is the exit clause. Such clause would define the situation of the exit. An exit may be voluntarily or forced exit as a result of termination. For such a situation a formal process or procedure must be provided. Such clause is known as an exit clause or a vesting agreement which is dealt by the founders.
Roles and Responsibilities-
In the founders agreement, the roles and responsibilities should be specifically mentioned. Through this the co founders can divide their respective responsibilities as per the requirements. Different functions can be managed by different individuals through this.
Transfer of Shares Restriction-
There has to be a clause dealing with the restriction on the transfer of shares. Usually a lock-in clause would be present to specify the same related to the agreement. However, there can be instances where the co founder would want to exit from the business before the expiry of the lock-in clause. To ascertain this situation, the valuation clause must be provided in the agreement. If the co founder wants to exit from the agreement, then the valuation and dilution of shares must be dealt by this form of clause. The method of valuation must also be mentioned in this agreement. If the valuation is carried out by a SEBI registered merchant banker or a chartered accountant. The agreement should also state if international principles of valuation is utilised.
Assignment and Licensing of Intellectual Property-
Any intellectual property which is created or invented by the original owner has the rights to the intellectual property. It is crucial to assign the intellectual property rights to the company once the founders agreement is drafted. Through this the company would own the rights which are created by the founders.
Additions of Value from Co-founders-
In the founders agreement another important clause which has to be added is any other form of value or addition related to the intellectual property right, research and development or some form of technical know-how of the founder. Though such information is proprietary in nature, the same must be included in the founders agreement. Having such specifications would remove any doubts related to the added value of the co-founders.
Non Compete Clause or Non Competition Clause-
Such provision related to non-compete or an agreement in restraint from carrying out trade must also be present in the founders agreement. Such clause must clearly restrict the founders from engaging in any activity which causes competition during their employment. Apart from this, such clauses in the founders agreement must be in accordance to the provisions of the Indian Contract Act, 1872. The non-compete clause must be not be unreasonable and if should be for a specific period post termination of employment of the founder.
One of the main provisions in the founders agreement would relate to confidentiality. Subsequent to the founders agreement, the founders should also enter into a Non-Disclosure Agreement or an NDA. This agreement would include the information which is confidential to the parties. Secrets related to the business would be present. In the event of breach of the term, a particular individual can utilise the clause related to breach of provisions.
If the agreement is dealing with sensitive and personal data of stakeholders then there has to be a clause dealing with data protection. The principles of the GDPR and the personal data protection bill must be incorporated in this agreement.
Terms of Employment-
The terms of employment of the separate founders have to be mentioned in the founders agreement. Apart from this, it is also crucial to have a separate employment agreement between the co-founders. The respective rights, duties, shareholding and remuneration would be dealt in this clause.
Decision Making Ability-
The ability to make decisions and take responsibility must be specifically mentioned in the agreement. Apart from this, different departments have to be designated to the founders. Through this the roles related to decision making abilities of the founders would be specified in the agreement.
Prospective Finance and Investment-
Another clause related to the prospective finances have to be mentioned in the founders agreement. The mode of providing future finances for the business must be mentioned in the agreement. If finance is given as a form of equity or as debt, then the provision related to this must be mentioned.
This clause has to be mentioned in the founders agreement. If any dispute arises between the co-founders then the mode of settling the same must be mentioned. This would not waste unnecessary time and expense in litigation. Dispute resolution can be carried out through arbitration, reconciliation, mediation or out of court settlement system.
Lastly the agreement must have a clause related to the termination of the agreement. The provisions post termination of the agreement must also be mentioned in the agreement.
Frequently Asked Questions
A founders agreement would only be an agreement between two or more individual founders of a partnership or company. However, a shareholders agreement would be drafted between the shareholders having majority portion of shareholding in the company. The rights and liabilities of the respective shareholders have to be mentioned in the shareholders agreement.
Yes it is mandatory to get this form of agreement drafted, as it negates the possibility of getting ousted from the entity without proper exit clauses. Apart from this, the founders agreement would also have provisions related to the responsibilities of the founders.
Yes such an agreement would have enforceability. When such an agreement is notarised on a non-judicial stamp paper and the requisite fee is paid the agreement would be enforceable in courts.
The penalties would be based on the amount of breach and severity of breach.
The following procedure has to be considered to draft a founders agreement:
• Appoint a Lawyer to draft the agreement
• Mention the points which have to be included in this form of agreement
• Draft the Agreement
• Review the agreement
• Get the agreement notarised.
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