Starting a new business with another person or persons can be a whirlwind of activity. There are many early bases to cover including finalising your business concept, deciding on the legal form that your business will take and protecting proprietary ideas.
This early stage is the time to sit down with your co-founders and work out some important details in your relationship that impact the business, such as your business strategy, what you expect of each other and what your respective rights and responsibilities will be. This is where a founders’ agreement comes in by setting out how you will interact and manage the business as a team. In this article, our corporate law experts explain what a founders agreement is and why you need one.
What is a founders' agreement?
A founders’ agreement seeks to protect each founder’s interests in the business and set out what the founders have agreed in relation to the business structure and how they will work together in building and managing the business.
It is a relatively informal document and generally comes in advance of more complex documents such as shareholders’ agreements, if you decide to run your business through a limited company or partnerships deeds, if you go down the partnership route.
A founders’ agreement typically includes the following:
- What your business is and where it operates, both in terms of sector and geography;
- What each founder brings to the business and how that is recognised in terms of ownership of specific elements of the business, such as intellectual property, various physical assets or cash in the bank;
- How the time that each founder has committed or will commit to the business will be recognised, either in terms of drawing a salary or in terms of equity;
- What happens if there is a dispute between you for any reason;
- What happens to the business and any underlying assets if one of you wants to leave, becomes ill or you would like to bring someone else on board;
- How business decisions will be made, including voting rights and what happens if there is no agreement;
- What happens if you decide to abandon the idea or business and start similar businesses.
Founders’ agreements underpin a well-planned business. They also demonstrate to potential investors that you are organized, have consensus on key issues and are thinking ahead.
Why do you need a founders' agreement?
There is absolutely no legal requirement to have a founders’ agreement. These are practical documents that protect what each of your brings to the business and set out at an early stage how your business will be run. Putting one in place ensures that you and your co-founders are in tune on critical and potentially tricky legal and financial issues and how these will be handled, solidifying your business venture and relationship.
What are the risks with founder relationships?
Many businesses begin life as an idea or an initiative between friends or relatives. Those relationships can easily break down under the pressure of trying to get a business off the ground and earn a living from it. Learn more about the dynamics of co-founder relationships and how a founders’ agreement is one method of avoiding potentially fatal disputes.
Should you use an online template founders’ agreement?
The short answer is no.
Whilst there are numerous online template founders’ agreements, these work on the basis that all businesses and founder issues are the same. They are not.
Issues such as who does what, who brings what to the business and how is that recognised, voting, dispute resolution, exit of co-founders and termination are different depending on both the founders and the business concerned.
It is more cost effective in the long run to have an agreement tailored to you, your co-founders and your business, covering specifically the aspects that could lead to disputes in your particular circumstances.
How does a founders’ agreement help in a recession?
A recession brings very specific stresses and strains to any business and can lead to a founder wishing to exit the business, try new strategies, make redundancies or simply stop spending.
A founders’ agreement ensures that you have decision-making mechanisms to deal with the scenarios that recession brings. In addition, it will contain exit provisions in the event that a founder wishes to leave or if you all decide to wind up the business. This brings stability to the business and your founder relationships during this difficult period.
If you are considering or in the process of starting a business with others, please contact our expert corporate solicitors who can help you to put a founders’ agreement in place.