Why is a Founder’s Agreement Important?

A successful business requires a solid foundation. While there are many elements of this foundation, the founders of the company being on the same page is one of the most fundamental. While it may seem odd to stop to put in place a legal agreement before you have your first customer, or when the business is really small, you would be surprised how much more difficult it can be to create alignment when you are flying the airplane while you are fixing it. If you’re planning to run your business with co-founders, then a founder’s agreement is pretty much the perfect place to start.

“Unfortunately, co-founding a business isn’t too dissimilar from marriage. You can start with all the right intentions and never imagine separating. But it does happen.”

Steps to Creating A Founder’s Agreement

  • Set a Timeline. A founder’s agreement is one of those things that lingers unless you hold yourself accountable to a date.
  • Use a Template. There are many templates for founder’s agreements available. There are plenty of templates available online for you to peruse. Choose the one you feel most comfortable with. Remember the template is just a starting point so don’t be concerned about the final language at this point. Here is another.
  • Complete The Basics. Fill out the simple stuff including name, company, addresses, etc.
  • Discuss the Issues with Your Co-Founders. Try to get aligned on the fact that you agree that this is necessary and will help both of you. Go through one by one the issues – compensation, equity, vesting schedules, roles and responsibilities, termination clauses – and talk it through. This will likely take several rounds of discussion. You want to walk away on the same page on all the major issues. This is easier said than done, but try to reinforce that you are both doing it to benefit everyone including the business.
  • Take Your Agreement to an Attorney. Your agreement will give them a good start and experienced attorneys in this area will be able to fill in the blanks. In addition, the attorney can act as a go-between for you and your co-founder if there are issues you can’t resolve. Lawyers aren’t free but they can add a lot of value in getting an agreement in place that everyone supports.
  • Review – Separate and Together. The lawyer should prepare a draft agreement for you and your co-founders. You should read it separately and then go through it together to lay out differences and points that need more discussion or clarification.
  • Finalize and Sign. Bring your collective comments back to your lawyer and have him prepare a final agreement for review and signature.

The process may vary for you but these steps should help you stay on track in accomplishing.

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