How to Build the Best Founders’ Agreement for Startups

With the immense amount of work you do when launching a startup, it’s easy to overlook creating a founders’ agreement. You’re in this together, and you trust your co-founders, right? Won’t everything be fine?

Even if you’ve known them for years and have complete trust in them, you still need to build a founders’ agreement. Like all contracts, that agreement is there to help you navigate daily business operations and resolve issues when something doesn’t go as planned.

The best founders’ agreements help everyone — don’t skip this step.

Related: Writing a Startup Business Plan

So, What Is a Founders Agreement?

When you build a founders’ agreement, you’re building a legal contract that every founder of your startup can enter. The agreement covers everything from who is involved, how much they will contribute, each co-founder’s role and responsibilities, legal service, and equity ownership to what happens if a founder leaves the company.

Founders’ agreements are legally binding and hold each person’s interests at stake. You should create this agreement at the start of your company’s lifecycle when you draft your business plan. It helps solidify what will happen between founders as you all join together.

What Do You Need to Include in Your Founders Agreement?

While every founders’ agreement will be different, there are some points you should strongly consider adding in to yours, including:

Your Company and Founders’ Names

You’ll find this section in every single founders’ agreement, and it should be in yours, too. It’s non-negotiable. First and foremost, your founders’ agreement needs to include the names of every person involved in the startup.

Also, list the name of your startup (even if you might change it down the road). It’s impossible to overestimate the importance of your startup name, which is also a reason why naming your new business can feel overwhelming. Choosing the best startup name can help push your company to a new level; however, a terrible one can hurt your startup before you even begin.

The Project

Your project section is another necessary inclusion, and you can think of it as defining your startup. You’ll want to write a couple of sentences that describe your business plan and include a broad overview of each founder’s interests, what the startup is doing, and the specifics of your plan in this section.

Essentially, the project section is a broad elevator pitch that includes some specifics that can answer questions and call for additional details about what you and your founders are creating.

The Ownership Structure

Including the ownership structure of your startup in your founders’ agreement is crucial — it’s where you determine the percentage of the company that each member owns. Keep in mind that this number might change as people join or leave your startup. And if your company is an LLC, you’ll also need to determine the percentage of management interest that each member owns.

So, in this section of your founders’ agreement, you need to determine which people are owners in solely an economic sense and which ones will play an active role in running and managing the business. Later, we’ll talk about adding those founders’ roles and responsibilities into your agreement.

Your Budget and Expenses

In this section, you’ll focus on writing out how you’ll handle your budget and expenses moving forward — it’s not so much about spelling out your exact budget and known expenses. Mutual written consent is crucial in this section of your founders’ agreement.

For example, will one founder be in charge of the startup’s budget, or can any designated member approve it? How will you reimburse expenses to founders that pay out of their pockets? How will they submit for that reimbursement? Answering those questions will help you write out this section of your founders’ agreement.

Initial and Additional Capital Contributions

Every one of your startup’s founders contributed something to become a founder. Whether it was cash, services, property, a promissory note, or a combination of the above, you need to include those contributions in your founders’ agreement.

If any founders or co-founders contributed something other than cash, everyone will need to determine and agree on the monetary value of that contribution and record it in this section. You’ll also need to decide whether each member needs to contribute capital continually throughout the startup’s life or solely at the initial investment.

The Founders’ Roles and Responsibilities

This section is essential, and many founders skip it because they believe their verbal agreement or unspoken understanding of everyone’s responsibilities is enough — don’t fall into that trap. Your founders’ agreement should clearly define each aspect of every founder’s and co-founder’s roles and responsibilities within the organization. You should write these out with mutual consent so that you can reference them later as the business grows.

Instead of letting your startup get to the point of people arguing over who needs to do what, spell out these guidelines in your founders’ agreement. By including each person’s role and responsibilities, you can ensure that everyone is rehashing each other’s work and that there won’t be future disagreements about different tasks. Inefficiency here can lead to the downfall of your startup — you won’t regret including this in your formal agreement.

Taxes

Taxes are tricky for startups. First and foremost, we recommend hiring a tax professional to help you create this portion of your founders’ agreement. Everything you include in this section will be extremely specific to your startup and its structure — copying a template or winging it won’t end well.

In the early stages, startups need as much help as possible, and as your business grows, ensuring details like legal services and taxes are properly defined in your founders’ agreement becomes even more critical. Writing this section is one time where it’s almost always a good move to invest in outside help.

Taxes are tricky — Learn how we can help your startup get its maximum R&D tax credit.

Related: How Startups Work and Grow

Equity and Vesting

Shares, stocks, equity, fair market value, and vesting — as soon as you start diving into determining your startup’s equity compensation, you’ll get slammed with terms that seem familiar, but you might now quite understand, like founder equity.

Figuring out this compensation and including it in your founders’ agreement is crucial, but it’s not easy if you don’t have an active knowledge of how it works. So, you’ll want to read up on all of the details about equity compensation — this guide from Holloway is an excellent place to start.

Rights: Management, Approval, Decision-Making, and Operating

Your founders’ agreement should also define:

• Who can vote on company decisions
• Who cannot vote on those decisions
• What parts each member can vote on

Some startups will give voting rights based on how much a member contributes or their founder equity, while others give limited voting rights to specific groups. You can also give some members veto rights, managerial rights, or supermajority votes without giving them voting rights. This section requires some critical decisions, and you should not take it lightly when drafting your founders’ agreement.

Intellectual Property Assignment

Your startup’s intellectual property (IP) is what makes it unique. So, the first thing to do is determine what intellectual property you have — what sets you apart from others? What are you producing in-house?

Your IP can include app ideas and designs, blog posts, or anything specific to what you do. Typically, anything you or your co-founders create during work hours is considered the startup’s intellectual property. You can also put in the agreement that anything created on work property (phones, laptops, PCs, etc.) becomes the startup’s IP. It’s up to you to determine and define your intellectual property.

There are two additional things to define in this section:

1. Selling Intellectual Property

Your IP can include app ideas and designs, blog posts, or anything specific to what you do. Typically, anything you or your co-founders create during work hours is considered the startup’s intellectual property. You can also put in the agreement that anything created on work property (phones, laptops, PCs, etc.) becomes the startup’s IP. It’s up to you to determine and define your intellectual property.

2. Confidentiality and Non-Compete Clauses

Finally, you need to consider whether or not you want to include confidentiality or non-compete clauses in this section. If you do include them, these documents ensure that you and other co-founders can’t consult for competitors (or become one). It’s worth putting a plan in place early, just in case.

Salary and Compensation

Your founders’ agreement should also include how you and your other co-founders will get compensated. How do you determine fair compensation? Well, it’s a tricky question and can be disruptive (like any issue related to money). Some founders won’t take a salary in the beginning, while others don’t have the resources to make that a viable start.

Every single startup is different, and each founder has varying relationships with their investors — there’s not a realistic one-size-fits-all approach to salary and compensation. These policies can make, break, or destroy a startup. Every founders’ agreement should include these details, so you want to become familiar with them before agreeing to or entering a partnership. Ensure that you know how much everyone will make, and don’t sell yourself short.

Termination and Dissolution Clauses

No founder wants to think about the end when building a startup, but it’s best for every member if you create a plan. Determine what events or circumstances would lead to your company’s dissolution.

You also want to outline waterfall distributions and winding up procedures to determine what happens to the startup’s assets if it dissolves in the future.

Departure or Removal of Founders

What happens if a member of your startup leaves for any reason? Including this section in your founders’ agreement can give the remaining members options to buy out the removed or departed member’s interests. And if you do include buyout rights, ensure how it would take place, the price, and the payout terms.

If you get stuck on determining a buyout price while your startup is still young, you can write a provision that the price will be based on the fair market value when the buyout happens. Then, an impartial third-party appraiser can determine that number when the time comes.

Dispute Resolution

When a dispute happens (and it will), what will you do? In this section, you can outline that procedure. Most startup founders require disputes to be settled with arbitration, but ultimately, it’s up to you and your other co-founders to decide how to resolve disputes.

Building Your Founders Agreement in Six Steps

Get started building the best founders’ agreement by following these six steps:

1. Find a template. You can find founders’ agreement templates all over the web. Look for one that fits with your startup, or you can piece together your own from multiple templates. 

2. Fill out what you can. Start by filling out the simple sections that don’t require too much thought — company name, creation date, location, and anything else that you don’t need to consult with each co-founder.

3. Work on the hard stuff. Sit down with your co-founders and start working on the tricky stuff, like compensation, equity, termination, etc.

Having these conversations isn’t always easy, but remember that you’re working together — it’s not personal; it’s business.

4. Get legal advice. As we mentioned in the tax section, getting professional help is crucial. You’ll want to have a professional non-invested person review your founders’ agreement to ensure that everyone is protected in the future and to catch any legal technicalities you may have missed.

5. Get another opinion. Legal opinions are excellent, but you can also reach out to other entrepreneurs or advisors to look over the agreement to get advice from a different angle. You can also black out financial info or personal information before asking someone to review your document.

Related: Sales & Marketing for Startups

6. Review and sign the agreement. Finally, have every co-founder review the founders’ agreement and consult their lawyers if needed. If everyone agrees on the terms, you can all sign and date it, creating a legally binding document for your startup.

Learn more about building and growing your startup with our free resources and take advantage of TaxRobot to get the most out of your R&D tax credits.