By Fernando Berrocal

‍

In the initial phases of a startup’s journey, it can be tempting to assume that your co-founders are going to become friends, everyone will always get along well, and you’ll ever encounter any difficulties. Apart from that, you must know that you will share the same goal with your teammates, so have faith in one another to take care of the business.

‍

‍

If things don't work out as expected, a founders’ agreement is a crucial document to have in place. It is there where you will go through daily activities and be assisted if something goes wrong. It is simple to overlook this vital step, so make sure to don't do it.

‍

Important Information Relating to Founders’ Agreements

‍

A founder’s agreement is a formal contract that contains all the details required for a startup in its early stages. It may involve different points, such as: 

‍

• Who is involved
• The respective levels of contribution
• What happens if they withdraw

‍

Remember: a founders’ agreement is a well-written contract that must be signed for it to be enforceable. With this, you may establish each of your unique objectives and requirements before heading into business with others.

‍

Clearly, before launching any firm, it's crucial to have a founder’s agreement in place. But what should it contain–and how should it be redacted? Although having a founder’s agreement in place is not required, doing so might be worthwhile if you have the time available. We suggest incorporating the following points as you draft your own founder’s agreement.

‍

• Names of the organization's founders. Even if it seems obvious, many entrepreneurs don't have this down clearly!  First, make sure that everyone's name is written down. Then, double-check to see that the name of your startup is included. Even if you decide to change course later, people will still know what it’s called.  Finding a fantastic business name is one of the most important and difficult tasks. So, knowing what to look for will be a key topic.

‍

• The ownership arrangement.  You can learn here how much of the business each member owns. This figure will be something you, your co-founders, and any upcoming employee of the business will all have an interest in. Depending on who enters or departs, it may alter the specific amount. The first thing to determine if you are a member of a Limited Liability Company (LLC) is what proportion each member owns of the business. You must understand whether they are only shareowners, or if they also participate in crucial management decisions.

‍

• Your core initiative.  Your startup itself is the best way to describe your initiative! You should include one or two sentences describing the work your organization undertakes. Include both a general description of your organization's operations and some specifics in your business plan. Consider a general introduction as something that would easily grab someone's attention while providing them with enough information for further research if they desire more details.

‍

• The initial investment and subsequent contributions. Keep in mind that everyone has contributed something to establish this business. These contributions, whether in the form of cash or services, make the business possible. There are several considerations to address when choosing the share allocation for the cofounders. Determine what each person provided and make sure they are aware of the amount of equity toward which their contribution entitled them.

‍

• Your budget and expenses. Set up the procedure for approving and reimbursing those charges once you've determined how much your organization firm can afford to spend on expenses. Will one person be in charge or will all the founders have access? Can they approve their requests for reimbursement? This section explains the specifics.

‍

• The applicable taxes. Hire a tax expert to ensure that your agreement has no loopholes considering that tax law is complex and constantly changing. It's better to avoid the possibility of making a mistake or snatching an idea from another business.

‍

• Your responsibilities and roles. You might assume that there is an implicit understanding regarding this; not so! Make sure you have a founder's agreement in place before allowing your startup to reach that stage. Each team member will easily understand their responsibilities and who to hold accountable if something goes wrong. Inefficiency is among the worst things that can happen to any type of startup.

‍

‍

• Operating, approval, and management decision-making rights.  Who should be able to influence business decisions? Some businesses decide to limit who can vote while others decide to provide voting rights depending on members' percentage interests. You could also give someone management authority without granting them the ability to vote–or give them the power of veto without granting them any voting rights.

‍

• Vesting and equity. Many terms may sound familiar when you start to look at how stock compensation for startups works, but it may be very difficult to understand what they imply. Even while you may not be completely familiar with them, you do know their name. Any explanation blog post only needs one paragraph before your eyes begin to glaze over since all you want to do is scroll through social media to unwind.

‍

• Salary and benefits. It can be quite challenging to determine how to adequately compensate you and your cofounders. Some founders choose not to take any compensation, while others are unable to do so. Since every startup is unique, it is impossible to determine with certainty how much an entrepreneur should be paid. There are good and bad policies, but taking an insufficient salary as a founder is the worst thing you can do.

‍

• Assignment of intellectual property (IP): IP is anything that distinguishes your business from others.  What are the in-house manufactured specialty products? Blog postings, software concepts, and general business planning are examples of a firm´s IP. Anything made when an employee is on the clock is regarded as the IP of that specific company. Some businesses have a strong rule that anything you produce using company resources automatically becomes the firm's IP. You decide how strict you want to be while implementing this regulation.

‍

‍

You must specify the IP policies that will govern when and how your business will consent to the sale of any of its ideas. Does the majority rule here? Or does one individual possess more influence? Early establishment of these parameters is crucial. One of the most vital factors to take into account when employing a new employee is non-compete agreements.  It's not always simple for people to take on a whole new career that doesn't entail selling, but if they're provided competitive compensation and perks, it can be worth it. Since cofounders require an exit strategy, it's crucial to prepare ahead of time, which is why you should consider a non-compete agreement. It might not be something you consider while starting a business, but it might be useful later.

‍

• Procedures for the removal or departure of a founder. The ability to remain members to purchase out a member in the event of their disability, bankruptcy, or termination is crucial to keep in mind. The cost and conditions must be specified. Try setting an upfront purchase price or inserting some form of fair market value provision if you are having problems agreeing on a buyout price (because your business is still young). In this manner, a third party who is not associated with either party will establish the worth.

‍

• Provisions for termination and dissolution.  It's crucial to begin planning for the demise of your business now before it's too late. Describe what would cause you and the other participants to quit working on it. If your business closes and it's time to divide all that revenue, you should also specify how the assets will be distributed.

‍

• Steps for the resolution of conflicts. It's best to discuss any issues you have with the agreement with your co-founders and come to a resolution.  Perhaps you will opt to use arbitration to resolve the conflict–or contact a lawyer.

‍

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.