Case studies
Paula Pul
Paula Pul
7 December 2015

Founders Agreement–first startup’s agreement

The article originally published on INNPoland on 21.08.2015

In my everyday practice I cooperate with startups a lot–in the scope of legal service, preparing investment documents or procuring funds from investors. Thanks to this, I have a chance to observe founders in various situations and at different development stages of their businesses. Many co-founders have known each other from university or even from primary school, other have worked together in a corporation or startup for several years, what raises mutual trust and hence lack of necessity to formalize the business relation between them (“after all, we know each other for years”). But let’s be honest: in spite of appearances, establishing a business does not differ much from marriage. At the beginning all have good intentions and common goals and certainly nobody considers  separation or divorce. Unfortunately, we will face various situations in life–that is why let’s plan and assume even the worst scenarios, otherwise a mere trifle from today can in the future even threaten the existence of your company.

Founders’ agreement–what does it regulate?

Founders’ agreement is a relatively simple agreement regulating most important issues pertaining to founders’ participation in a startup. Naturally, it won’t be easy to determine specific conditions of co-operation, all the more so to write them down on a piece of paper. Anyone who has experience in this area will tell you that it is worth having basic issues  regulated at the very beginning of your common business path instead of starting to consider them e.g. as far as in the course of procuring funding. Unfortunately, I know a few cases where it was the absence of fixed conditions between the co-founders that broke really good projects.

There is no general principle as to what such agreement between founders should contain. You can include in it everything you deem significant. In my article I have chosen and discussed five elements which, according to my experience, are most important.

1. Division of shares in the project

It is one of key issues to be regulated in the founders’ agreement. Talks concerning division of shares (pre-money, of course) should be carried out as early as possible. It is not an easy issue, so, in order to go through it possibly smoothly, founders (particularly those inexperienced) often share them fifty-fifty. In certain cases it may be justified, but in most it is not. This, in turn, will generate problems in the future as surely some co-founders will feel undervalued or even exploited. Without settling such a key issue we won’t move further with the project–in most cases there will be always conflicts and problems (also subconscious) related to this.

2. Duties and contribution to the project of each founder

Depending on the stage at which we sign the founders’ agreement, we have to regulate in it duties of the founders and often also the existing contribution of particular persons (for instance, creating a logotype, website, developing hardware solutions, amount of money contributed). You may ask why this is so important. Well, in the long term, lack of division of duties and regulation of existing contributions (particularly in the context of intellectual property rights, what will be discussed further) may completely block your further proceeding with the project, and in the best case generate organizational problems which will hold Your activity for several weeks/months. Founders’ roles may change with time, this is natural. Yet it is worth to determine in the beginning, who is responsible for technological development of a product, who for finances and who for management board etc. This will allow you to operate quickly and efficiently and enforce responsibility for the performance of your set goals.

3. Decision-making process

The founders’ agreement should regulate issues pertaining to decision making, also those key ones. I have heard several times that a startup is a bit like a family or a group of friends, so decisions should be met jointly and all founders should have equal votes. Unfortunately, such system does not work in practice, and in the long term leads to frustration of particular team members and general chaos. Of course I do not suggest that imposing decisions by one of the co-founders is the only right method to make them, but you have to set up some rules. Start with determining who is to make simple (every-day) decisions and which decisions should be voted upon. If your team consists of an even number of members, determine e.g. which one of you will have the final word. Necessarily, agree upon values (goals) which are key to you while developing a project and which always have to be taken into account while making key decisions. This is very important: a startup can have several co-founders, but not several co-CEOs.

4. Vesting

Vesting is used not only in investment agreements, it can be as well applied in the founders’ agreement (however, in a little bit simplified form). You can read more about vesting in my earlier article HERE. Why it is worth regulating issues related to vesting at such an early stage of a project? For very prosaic reasons: whereas in the beginning of the operation all have drive and energy for action, unfortunately it happens that after several months the enthusiasm drops, all the more if talks with investors protract. Vesting will secure you against claims of an unfair co-founder who has stopped involving in the project but will nevertheless expect profits in connection with the obtained funding.

5. Issues related to IP

As the co-founders, from the very beginning of working on your idea, you are developing intellectual property which will be a significant capital of your future company. It can take the form of know-how or more tangible elements, such as visual identification, hardware solutions, mobile applications etc. All of these compose a product you will later want to present to an investor and finally obtain funding for its development. If you fail to specifically regulate the issues related to IP, you can squander months of your work, and, in the worst-case scenario, even close talks with an investor (but not with an investment). Therefore, devote a lot of attention to these issues in your founders’ agreement (particularly in the context of founders’ liability to transfer proprietary copyrights to the developed works to the company).

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