Home News Main What Is A Founders Agreement, And Why Does Your Startup Need One?

What Is A Founders Agreement, And Why Does Your Startup Need One?

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If you’ve decided to set up and run your own business, you’ll have realized by now that it’s a bit of a minefield. In a startup, you’re entirely reliant on a very small number of people around you to turn your vision into a reality.

If there is more than one founder of the business, it’s essential that you write up a founders agreement – a type of document that clearly spells out each person’s responsibilities in the company. It’s best to do this right at the start, before you begin trading or developing a product, since leaving it until later could jeopardize your business. Different agreements have different clauses, but the majority distinguish between the various types of stakeholder, giving various rights to different categories.

Here are some of the reasons why you might want to draw up a founder’s agreement.

It Can Show You How To Resolve Disputes

The founding fathers knew that dispute resolution would need to be a central part of the American Constitution, and so they developed all sorts of mechanisms by which people could solve their problems. Companies need to do something similar, putting clauses in the agreement as to what should happen next if certain requirements by stakeholders aren’t met. For instance, a founders agreement can set out at what stage it is appropriate to seek mediation to avoid court action. Founder’s agreements are also a great way of setting out how shares should be distributed in the event that the value of the company suddenly starts to rise.

It Can Protect Founders

One of the reasons people get self employed, directors & officers Liability Insurance from businesses such as Kingsbridge Contractor Insurance, is that there is a strong possibility that certain key people will leave the company before it has a chance to get going. Directors who abandon the company can often leave their fellow founders in desperate financial straights, since their presence in the business is essential for getting it off the ground. A founders agreement, therefore, can contain clauses which discourage abandonment. Things like not awarding any shares unless a founder spends at least five years with the company is an excellent way to incentivise loyalty and give the firm a chance to stand on its own two feet.

It’s Attractive To Investors

Investors want to be reassured that where they’re putting their money is safe. But companies that don’t have a founders agreement are liable to fall apart at the seams. Investors, therefore, want to see that a business is planning for all eventualities and that it has procedures in place that will allow it to resolve disputes quickly in the future. The last thing that investors want is a company falling apart immediately after they have given it a significant injection of cash.

It Helps Control Who Owns Shares

Sometimes, a founder may wish to sell their shares and leave the company. While it’s perfectly legal for founders to do this, it can often mean that they sell their shares to the highest bidder, which might be somebody from outside the company. A founders agreement, however, can give other founders first refusal on shares should another founder want to sell up and leave the company.

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