Starting a company is the beginning of a years-long journey filled with highs and lows. It can be intimidating to embark on that road alone. For many entrepreneurs, having a co-founder makes the journey more enjoyable.
Not only do you have the opportunity to work with someone that complements your skill set, but also you share the hardships and celebrate wins together.
But no matter how good the relationship with your partner is, you’re bound to run into differences down the line. When clashing opinions arise, a founders agreement can come in handy.
Founders agreements are especially useful if you choose a business structure that involves other shareholders, like a partnership, limited liability corporation (LLC), or corporation.
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An operating agreement is a legal document specifically used by LLCs that sets expectations and guidelines for members of the LLC. A founders agreement covers the founders only, and it’s usually written before you create the company.
Operating agreements, on the other hand, are created when partners enter into an LLC.
Another difference between the two can happen if you bring in more partners than founders. Say you have three founders, and you bring two more people into your LLC. The three founders sign the founders agreement, but all five partners sign the operating agreement.
Founders agreements aren’t a requirement when starting a company. But here are a few reasons why you should consider one.
There’s no standard structure for these contracts — they vary depending on factors like industry, location, and arrangements with co-founders. However, you’ll see some common sections in most agreements.
Here are the topics to consider adding and all the steps to take before you sign.
Figure out what you want from the contract and business. Some questions to consider:
When you come prepared with your priorities, it’s easier to have a productive discussion with your co-founders.
Once you and your co-founders agree on the major points, it’s time to start drafting the document.
Jonathan Tian, co-founder of CreditYelp, shares that they started the process using the Clara tool, but you can also use templates (more on that below).
Here are the sections to include for a thorough agreement:
Start with the company name, founders’ names, and their positions. This prevents future non-founding employees from claiming a founder title.
This section can also include a breakdown of the ownership structure and a brief description of the business plan, mission, vision, and goals.
Outline which company functions fall under each founder’s area of responsibility. The founders’ roles should play into their strengths.
Should there be an overlap in a certain skill, set assignments. For example, say both founders want to be involved in marketing. The agreement can detail that Founder A will deal with inbound marketing while Founder B handles outbound marketing.
Other things you may want to include:
Besides equity shares and voting rights, founders have decision-making rights. These cover everything from minor approvals to major decisions, such as:
A common pitfall is not accounting for deadlock situations. You can avoid this by electing a decision-maker and giving veto powers.
Some questions to consider:
There’s no rule saying co-founders receive equal ownership. While many divide startup equity evenly among the founding team, others allocate it based on factors like who came up with the business idea, who shelled out the most initial capital, or who has the most experience or connections.
Discuss the percentage each founder gets and include a vesting schedule that details when they receive full rights to company shares. Add a clause stipulating conditions before equity ownership becomes available.
Most companies choose a time-based vesting term, ensuring founders work for a set period of time.
According to Harvard Business School, the usual term is vesting quarterly over four years, with a one-year cliff (or allowance). A one-year cliff means that you have to wait a full year before the vesting starts.
Some questions to consider:
9 templates to help you brainstorm a business name, develop your business plan, and pitch your idea to investors.
