Launching a startup is an incredible experience.
The excitement among founding members when the idea becomes a reality is second to none.
But… There are some not-so-fun aspects of launching your entrepreneurial venture.
One of those is dealing with paperwork—particularly the founders agreement.
Without this document, you leave your company vulnerable to a downfall or potential destruction.
But, with it, you’ll have peace of mind knowing you’ve safeguarded your startup from unnecessary trouble.
What Is a Founders Agreement?
A founders agreement is a legal contract used when launching a startup when there are multiple founders involved.
This contract can include a variety of details, including who’s involved, roles and responsibilities, how much each founder will contribute, equity, legal services, and more.
The contract usually includes necessary actions to take if someone wants to leave the company.
The founders agreement is a legally binding contract between founders that protects them and their assets within their company.
It should be written up with each founder’s interests alongside the business plan before the founders officially launch their business into the world.
Why Founders Agreements Are Important
A founders agreement is a baseline of trust with your co-founder(s). Not only does it cover how your startup will be structured, but it also includes what each owner will bring to the company.
It’s a crucial contract to have no matter what industry you’re in or what business entity structure you have.
While this document is technically optional, we would never recommend launching a startup without one.
You can think of a founders agreement like insurance. It’s your safeguard against the unexpected.
It’s hard to say what can happen in a few years with a business. Goals change. And, people can change. Even if you trust your co-founders with your life, it’s best to not leave company details to a handshake or verbal agreement.
Even if you’ve already started your company, you can and should still draft a founders agreement. It’s better late than never.
Here are a few reasons why a founders agreement is essential:
- Provides clarity for founders’ roles and responsibilities
- Provides structure for resolving disputes
- Provides clarity if/and a founder decides to leave the company
- Protects minority owners
- Communicates to investors you have a real business
Most entrepreneurs and lawyers understand that a founders agreement is a simple litmus test to see how your business stands when it’s young.
Even if circumstances change later on, you can update the document to make any necessary changes.
When (not if) conflict arises in your company, referencing your founders agreement is a simple way to come to a quick solution so you can move forward.
6 Key Elements to Include in Your Founders Agreement
A founders agreement isn’t a necessity to start a business.
But, it is a necessity if you want your business to be taken seriously.
This document isn’t something you should just print off the internet. It needs to be crafted to address the specific needs of your business.
And, while there isn’t a formal structure for founders agreements, there are a few key elements you should definitely consider using in yours:
1. Names of Founders
This is a non-negotiable on your founders agreement.
You need to make sure you include every single founding member of your company.
Don’t forget, you need to include your company name as well—since it could change later.
2. Ownership Structure
Your company ownership structure is simply how you determine what founder gets specific ownership percentages within the company.
This is known as equity ownership.
While this number can change as different people come and go within the company, you should ensure it’s written down from the start.
If you have a Corporation in Ontario, you should also determine what percentage of management interest each founder owns.
This means you need to determine if each person is an owner in a strictly economic sense (non-active), or if they play an active role in managing the company as well.
This includes their roles and responsibilities.
3. Initial Capital
Every founder in your startup has to contribute something to become a founder—whether cash, promissory note, property, or services rendered. It could also be a combination of those.
You need to include the specifics of each member’s contribution in the founders agreement.
If one of the founders contributes anything other than cash, you need to determine the monetary value of that thing and record it.
You should also record what members will continue contributing capital throughout the business’ life or if their contributions stop at the initial investment.
4. Roles & Responsibilities
This is one of the most important elements to include in your founders agreement.
A lot of mistakes with founders agreements comes from not including enough information in this section—or not including this section at all.
Many founders have handled roles with verbal agreements. But, don’t let yourself fall into that trap.
You need to define every aspect of all co-founders responsibilities.
If you don’t, you could end up with one or a few people lazing around while you or someone else carries the weight of the company—which can create massive conflict, such as resentment or even dissolution.
Make sure you spell out exactly what each founder’s role is within the company as a simple reference point when addressing certain issues.
5. Departure or Removal of Founders
While many founders believe they’ll stand side-by-side with their co-founders to the end, the reality is that people will come and go.
If one of your co-founders goes bankrupt, becomes disabled, is fired, or worse yet—dies, what do you do?
You need to include a section in your founders agreement to tackle the potential departure of a founding member.
This means including details on how to buy out a departing member’s interests. This could include buyout rights, which means outlining how a buyout will take place, what the buyout price would be, and the payment terms.
6. Confidentiality & Non-Compete Clause
This is also an extremely important safeguard to include in your founders agreement.
A confidentiality agreement and non-compete clause prevents co-founders from consulting for your competitors—or worse, becoming one of your competitors.
While it isn’t a fun topic to think about when you’re first starting out, it’s an important element any startup should include in their founders agreement.
Need Help Drafting Your Founders Agreement?
Are you the founder of a startup in Ontario?
Do you need help creating a founders agreement for your company?
If so, you’ll want to reach out to an Ontario lawyer to help you create the contract. For help with your agreement, or, if you have any questions about the founders agreement process, reach out to us at Falcon Law.
Right now, we’re offering free virtual consultations for founders of startups in Ontario.
Click here to book a consultation today.
