How to Draft Founders or Co-founders Agreement

The co-founder’s agreement, as a document, can be made legally enforceable by simply printing it on non-judicial stamp paper, which must be signed by the relevant parties with the appropriate stamp duty varying by state. A co-founder’s agreement is a legal document that specifies the terms and conditions under which a startup’s co-founders will operate their business. This agreement provides coverage in the event of a disagreement between the co-founders. The co-founder’s agreement must be drafted based on the lines of business. It must include all provisions relating to the factors for which the co-founders will be held liable.

This agreement must be accurate, so it is best to seek the assistance of a lawyer or a firm to draft it properly. This document can prevent the founders from becoming confused if their circumstances change, whether psychologically, financially or economically.

Reasons to Create a Founders’ Agreement

Founders’ agreements form the foundation of a new business or startup. They establish the tone and lay the groundwork for how you interact and manage the business as a group. While a founder agreement is not required, drafting one ensures that everyone agrees on all critical legal and financial issues concerning the business.

• Sets up ownership roles and responsibilities.
• Provides dispute resolution guidelines and contract termination rules.
• Provides instructions for handling a dissolution.
• Protects minority shareholders
• Establishes the seriousness of your business formation.

Legal blunders are another common pitfall of new businesses. While you do not need to attend law school to run a business, you should become acquainted with critical legal issues and determine how your company will handle them.

The steps for drafting the founder’s agreement are as follows

• The draft of the founder’s agreement is prepared by including all of the required fields, such as the objectives of the company, and terms and conditions to be followed by the co-founders.
• Once the drafting process is completed, check if all mandatory provisions are included, with no ambiguous clauses.
• Add additional information that must be provided in the agreement, if required.
• The final draft should be acknowledged by all co-founders as having been scrutinized with acceptance of the aforementioned agreement.
• After all co-founders have agreed on the agreement, it should be notarized on non-judicial stamp paper.
• After notarization, obtain the signatures of all co-founders on the agreement.
• Before agreeing, get expert guidance to avoid disputes.

Documents required for a Founders Agreement

• Address proof for all co-founders.
• Identity verification for all co-founders
• Witness Identification Proof
• A clear goal of the company.
• The equity shares of each co-founder
• The combined percentage of each co-founder’s shares.

Benefits of a Founders Agreement

• Determining the type of Business Entity: The founder’s agreement specifies the type of entity to be established by the co-founders, ensuring a clear path to follow.
• Outlined Business Plans: This agreement describes the entity’s vision and mission, as well as the short and long-term goals that will be met over time.
• Designing the roles and responsibilities: Obviously, there will be overlapping roles and functions between co-founders in the absence of a proper framework for assigned roles. As a result, it is critical to define the roles and responsibilities of the co-founders by their areas of expertise, such as marketing, operations, and finance.
• Structure of Ownership: The founder’s agreement will specify the ownership structure in terms of the cofounder’s initial contribution or the percentage of equity shares held by the cofounder in the case of a company, thereby avoiding future conflicts between them.
• Making decisions: At some point, ideological disagreements between co-founders will arise, and these disagreements must be resolved through the proper decision-making process. The founders’ agreement will create a procedure to be followed during the decision-making process. If the voting system is implemented, it should specify the number of votes for each founder and provide a solution in the event of a deadlock.
• Compensation provisions: This agreement laid out the compensation scheme that would be implemented if any of the cofounders violated the provisions mandated. Every cofounder’s compensation proportion will be mentioned here.

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