What a founders agreement covers,and why to sign it early

You have an idea, one or more partners, and now you need to decide how to move forward. One of the first questions is when to bring in a lawyer. The answer: at the very start, before you write a founders agreement, and preferably with a lawyer who knows company law well.

At the beginning everything feels simple. The partners agree on the idea, trust each other and want to get to work. But this is exactly the stage when relations are good and there is little at stake, which usually makes it easier to agree on the rules.

What is a founders agreement?

The name says it. A founders agreement governs the relationship between the founders: the first shareholders, the people who set up the company.

It is written for today, but mostly with an eye on the future. It sets out in advance what happens when the company grows, when an investor comes in, or when one of the partners wants to leave.

Before the company exists

It is important to sign a founders agreement even if the company will only be incorporated later. The partners are already working together, investing time and sometimes money, and developing an idea that may become a company asset. A written agreement records what they have agreed from day one.

When the company is registered with the Registrar of Companies, its articles of association can be drafted to reflect the founders agreement. That way the partners' understandings become part of the rules the company runs by.

What does a founders agreement cover?

Every agreement is tailored to the partners and the company. Among other things, a founders agreement will cover:

• How the shares are divided between the partners.
• Protections in future deals and share allocations.
• Who does what.
• How the board of directors is appointed.

Dividing the shares

The share split determines each partner's stake in the company. It usually affects the right to profits, voting power at the general meeting, and what each partner receives if the company is sold.

So it is worth setting it out clearly and in writing, rather than leaving it to a verbal understanding.

Protections in future deals and allocations

A growing company raises money, issues shares to investors and employees, and is sometimes sold. The agreement can set out in advance what happens to the partners in each of these situations.

Examples of such mechanisms are a right of first refusal, a tag-along right, a drag-along obligation and a buy-sell clause (BMBY). Each of these is explained in the article on company law for founders.

Roles

Who will run the company, who is in charge of development, and who handles sales? Early on, roles are often fluid. Even so, it is worth writing down what each partner commits to contribute and to what extent.

Questions worth answering at this stage:

• Who will work in the company full time, and who part time?
• Who may sign on the company's behalf and commit it?
• What happens if one of the partners stops contributing as agreed?

Clear roles help prevent misunderstandings as the workload grows and the company starts hiring.

Appointing the board

The board of directors sets the company's policy and oversees the CEO. The founders agreement can set how many directors there will be, who may appoint them, and how decisions are made.

When there are only two partners, it is important to think ahead about what happens if they disagree, and how such a disagreement will be resolved.

In short

A founders agreement is not a sign that the partners do not trust each other. It is a way to put in writing what you have already agreed, and to prepare for the company's next stages.

This article is general information, not legal advice. For advice on your situation, contact the office.