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Why you need Founders' agreement?

Founders' agreement is very necessary for the existence of any business startups. There are many companies which failed due to lack of a proper founders agreement. You can’t know the direction your startup will take. It may grow to reach new heights where the founders will develop conflicts.

There are many things involved in a business setup. There are times you incur losses, and sometimes you will make huge profits. The agreement will play a crucial role in indicating the percentage of profit or liabilities each founder will bear. It makes things easy for you to know the way forward from your startups. Reasons why you need Founders' agreement?

Outlines responsibilities and decision-making process

You are not assured of what may happen to your lives or business in the future. It is necessary to describe responsibilities of each of the founders so that you can run your business smoothly at all times. The agreement should state the role of each one of you. For instance, it can specify one member to be in charge of operations while the other is in charge of major decision making. There are times when you will disagree with each other in your decision-making process, in such a case the founder's agreement should indicate the founder who will make a final decision. It is necessary for you to avoid escalation of conflicts in your business which can reach levels where the company will risk dissolution.

Equity Ownership

The founders of the company will dictate different amounts of money and time in the business. The agreement should state clearly the ownership strategy of the business and how it can evolve over time. The best agreement should align the business success with the financial success of the company. It is necessary for you to avoid cases where the business will succeed, and you end up in conflicts on how much each one of the members will receive. A good agreement should share the profits from the startup concerning the amounts of resources each member has contributed towards the company.

Exit Strategy

It is necessary for you to align your objectives, vision and exit strategy in business. No one will like to think about exiting the startup when it is time to start the business. But, you should be open and put straightforward procedures which should be followed if one of you will like to exit. This is necessary to avoid cases where people with varying opinions will exit the company when you need them or their exit will lead to unbearable losses in your business.

Founder Departures

There are times when founders will like to leave the business and concentrate on their personal issues. It is necessary for you to avoid cases where the founders will leave your business and expose your business to the risk of dissolution. You can end up wasting a lot of time trying to negotiate on what should belong to who after one of the founders decide to quit, but a good founders agreement will make it easy for you to take action on the best way for you to quit the business.

Read:  10 Reasons why startups fail

Ownership of Intellectual Property

The intellectual property developed by the company should be assigned to the enterprise. You should avoid making mistakes of assigning copyright ownership to individuals. If one of you decided to part way, and you had developed the intellectual property or your business assigned it to his name, then he will render your startup less useful in operating. You should always check your founder’s agreement and ensure the intellectual property is safeguarded under your business name.

Sales/Mergers/Material Transactions

There are times you will come across new offers. It will be easy for you to take advantage of new offers such as material transactions or mergers if you have clearly indicated under your founder's agreement the way you can merge or carry out future transactions affecting your business operation.

Company Dissolution

It will reach a time when you will have to shut down your business due to different reasons. It is necessary for you to have a clear plan on how the company can be dissolved during your startup stage. It is necessary for you to avoid cases where you will end up dissolving your company, and you end up disagreeing on how you can share proceeds which will be generated due to the dissolution. 

So, do yourself a favor and make sure to draft a founders' agreement.

This is a YourStory community post, written by one of our readers.The images and content in this post belong to their respective owners. If you feel that any content posted here is a violation of your copyright, please write to us at mystory@yourstory.com and we will take it down. There has been no commercial exchange by YourStory for the publication of this article.
Bittu Kumar is Co-Founder of Enterslice, a Company that helps entrepreneurs start and manage business in India.

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