(Maybe) The Top 10 Founders Agreements Do’s and Don’ts

Welcome to my first listicle!

Everyone has told me that I must start writing posts in the form of lists. “People love lists”, they tell me.  However, I’m not sure if these are actually THE top 10, and I’m an accountant and I do love me some accuracy in my assertions, so I’ve qualified the title.  You have been advised.

People have also been telling me that I must include a question at the end to generate conversation. So, I’ve done that as well!

It’s a banner day, here at CFO Secrets. 😉

What is a Founders Agreement

Before we move into the list, let’s start with a few words of definition. A founders agreement is an agreement signed by the founders of a company  which establishes the initial  framework for the new venture and the working relationship between the founders.  The content will vary from company to company, but topics covered tend to include:

  • project description;
  • individual founder roles and responsibilities;
  • equity ownership, rights and vesting;
  • decision making processes and rights (e.g. veto rights);
  • contributions of each founder to the venture (e.g. money, time, intellectual property);
  • legal protections (e.g. confidentiality, IP assignment, non-compete terms);

…and more along those lines.

And now, The List

DO  sign off on a Founders Agreement as soon as possible after you and your co-founders decide to go into business together. Per Adrian Daniels, of Yigal Arnon,  ideally this should be before you even establish your company. This seems like overkill, right?   Drafting some fancy-shmancy legal document when all you and your co-founders have is an idea?  Yes!  Do it now, while you all still like each other and before any of you has contributed your money, time and skills or property to this venture.

And for the record, apparently, these don’t always have to be fancy-shmancy. You can use an online template as a starting point and have it gussied up by a lawyer later.

DO spell out key matters regarding Founders’ rights in their shares.  For instance, consider making Founders shares subject to vesting over time (e.g. four years) and/or performance. You don’t want that slacker, who seemed so great on Day One but vanished from Day Three, to continue holding 30% of the shares. (Nor will potential investors like this). On a similar note, you’ll want to control what Founders—including the slacker—can do with the shares they have by incorporating clauses such as a Right of First Refusal (RoFR) or  Tag Along Right.

One caveat: per Daniels, all of these lovely vesting provisions and share rights clauses will very likely get ripped up by new investors who will impose their own terms. So don’t get too attached.

DO discuss how decisions will be made and incorporate key decisions (e.g. approving additional share issuances or investment rounds) into the agreement.  What decisions require a unanimous decision? Which require a majority? Which can be delegated to one member of the team?  While you are at it, define which of the Founders are to be on the Board of Directors (or say “all of us”).

DON’T assume that “we are a classic startup, everyone pitches in with everything”.  This is a recipe for serious inefficiency at best and disaster at worst. Assign roles and add those to the agreement as well.  Who is the CEO? Who is the COO? Who is in charge of the marketing? Which one of you is the point person for legal and finance? And so on.

DO spell out—clearly— what each of the founders is to be contributing to the venture in exchange for their shares.  If Founder A is contributing $100,000 , Founder B is contributing his intellectual property and Founder C is committed to working full-time for the venture for at least two years, write that down.

DON’T shy away from discussing (and putting into the agreement) what to do if one of the founders leaves the company on their own, or if the other founders want to kick one of the founders out.  Think of this document as a prenuptial agreement for your business.  Some unions break up.  Yours may be one of them.  Be prepared.

DO talk about money.  Yes, it’s awkward, but do it anyway. From what point will founders be eligible to receive a salary?  How will these salaries be set?  If Founder C is quitting her job and working for the venture full-time, she may well expect (not to mention need) to get paid for this.

DON’T forget to incorporate confidentiality, non-compete, non-solicitation and (iron-clad) IP assignment clauses into the agreement. And, of course…

DON’T do any development/IP-related work for this venture or transfer existing intellectual property to it before everyone is signed off on the Founders Agreement, confidentiality agreements and the IP Assignment!

DO use this opportunity to have a broader discussion about the venture’s projected product line, goals, plans, values and so on.  This will not only allow you all to assess if you are roughly on the same page but also whether you are capable of working together and hammering out a shared vision from multiple individual ones.

To learn more, and  for a list of questions which you can use as a guide for the discussions you and your co-founders will want to have as part of this process, see here.  This article also provides a nice walkthrough of the discussion and drafting process.  Additionally, I was recently at the JLM-BioCity conference where Jerusalem (yay! Go JLM!)  lawyer  Jeffrey Rashba gave a presentation on tips for making a successful startup. Among other things, he spoke about Founders’ Agreements.   He was kind enough to share his presentation, which you can find here.

And, if you disagree with my top 10, please do so note in the comments, and share what you think should have been in there.  The more knowledge, the merrier.

My thanks to Oran Goldstein of Hubstair in Hod Hasharon for giving me the idea for this post.