Founders’ agreements are one of the most critical components to a successful new business venture. Failing to adequately document how founders interact, operate, and protect their assets from the very beginning is a sure-fire way to spell disaster later. Each new venture has its own unique challenges, but the following topics should be discussed in every founder’s agreement:
Roles and Responsibilities of Each Founding Member
Any good founders’ agreement should clearly define the roles and responsibilities of each founding member. All too many startups, including seasoned entrepreneurs, make the mistake of believing that every decision must be universally agreed to by all founding members, without fail this inevitably leads to disagreement and a breakdown of the efficient operation of the business. Startup teams have the tendency to view their founding or early-stage team as a unit that must always be in perfect agreement to the trust needed to succeed, but this simply isn’t how successful businesses operate. Divide and conquer, define the expertise of each team member, and empower them to hone their craft.
Sometimes, founding members must be jack-of-all-trades at the beginning, that doesn’t mean you can’t define which business needs each founder should focus on. Limit the distractions of the team by allowing each person to focus on certain areas and then let your team members succeed or fail in those areas. Defining key roles allows the business to place each member in areas where they have their greatest strengths and maximizes their utility. This isn’t to say that a founders’ agreement won’t spell out certain situations where a unanimous vote is required, but it limits the chance for the business to get bogged down over non-critical decisions.
Equity Allocation and Vesting
Deciding how to allocate the equity of a startup can be one of the most difficult tasks initially faced by founders, the potential for misunderstandings (both present and future) and disappointment is not uncommon. Avoiding these issues is essential to preserving a cohesive founding team.
Determining equity allocations amongst founders can and likely will tie in to how a startup determines the roles and responsivities of each founder. As mentioned before, requiring equal decision making amongst founders is a recipe for disaster, which means that equity allocation and vesting will likely go hand in hand with determining each founder’s role. Ultimately, the business needs someone to make the final decisions, that person likely will either have majority voting control or some sort of tie break authority. This can be determined in a variety of different ways but should be considered carefully.
A founders’ agreement should also discuss what happens to a founder’s equity in the event they decide to leave or are asked to leave the company. Vesting schedules and buy/sell provisions are a common way in which the founders earn their equity by contributing the business over a set timeline while also defining the process of buying back any equity a founder may have earned should they leave the business before a certain period of time. Having this system in place can help create clear guidelines for future investors. Without clear guidelines in place from the beginning, the chance that a startup encounters dead equity and decreased investor interest become a daunting reality.
Intellectual Property Ownership and Assignment
Intellectual Property is one of the most valuable assets that any business has and the creation of intellectual property often starts before a business is even formed. It is not uncommon for founders to formulate, iterate, and develop ideas and tools that will become the core of their business before they formalize their founder relationships and businesses. The act of developing a business concept or product can be deemed intellectual property that, without the correct documentation, belongs to a founder individually instead of to the business. Failing to identify the work product, ideas, or business concepts that a founder is contributing to a business can have disastrous results. A founder’s agreement should clearly identify all intellectual property that belongs to the business and document the transfer of any intellectual property that previously belonged to a founder but will transfer to the business in exchange for the founder’s equity or compensation. This also holds true for any employees, consultants, or independent contractors that assist the business before or after its formation.
If your business fails to properly identify what intellectual property it owns when founders, employees, consultants, or independent contractors perform services, you may face a situation where you are confronted with legal action over the use of intellectual property that you thought you owned outright.
Get It Right the First Time
Starting a new business venture is filled with excitement, the rush of possibility is present every day. However, the rush of the early days can lead to costly results down the road if you don’t slow down to make sure your business is setup to succeed later. A good startup lawyer can identify the potential pitfalls and get you started on the right path. No one wants to see a founder spent years building their business only to find out that one small mistake early on stands in the way of them reaping the benefit of all their hard work. Let us help you make sure your business gets off on the right foot.