|The Founders’ Agreement|
|This week’s concept: The Founders’ AgreementWhat is it: |
A Founders’ Agreement is a semi-formal agreement between co-founders on the conditions of vision, split, authority, and future of the venture, among others.
It consists of both formal and informal parts:
Formal: The two formal sections of the agreement are items like the way the company is to be divided among founders.
For example, is it a 50-50 split with both founders having an equal stake? Or will it be a 45 – 55 split to ensure there are no ties when it comes to decision making? Both scenarios have their pros and cons for different partners.
Also included in the formal portion of the founders agreement is vesting.
Vesting is when founders only receives a portion of the company after meeting certain milestones – the most common being the amount of time spent working for the venture.
This ensures that no founder is able to leave and take with them such a large portion of the company that the rest of the team loses morale.
These two parts are considered more formal as the equity split (how much each of the founders own) will usually have to be formally recorded with the government or an institution.
Informal: The informal section consists more of written and unwritten decisions between founders about their relationship and issues on authority and ownership which may crop up during the course of doing business.
These usually consist of the following: Decision-making: This section will cover how the decision-making process will be among founders. This is especially useful when the founders have shared skillsets but differing opinions and ideas. In this section, the partners can also discuss shared core values which will guide decisions.Asset ownership: This section is more focused around the assets that each of the founders are bringing to the venture. Partners will clarify how the assets and IP may be divided amongst each other and the rights the venture has to them. Compensation: Remuneration can be a contentious topic among partners and can be the source of resentment within a partnership. The best way to mitigate this is to discuss a fair agreement among partners before any emotional baggage is created. Disputes and Resolution: During the course of business building, disputes and conflicts will arise among business partners. By discussing and agreeing upon a process to settle these conflicts beforehand, co-founders can ensure a neutral way to resolve these issues without hurting the co-founder relationship.Vision and Exit: This section is to align with your co-founders on the vision for the eventual future of your venture. This is as a difference in vision will cause founders to differ in opinions when making key decisions. An important idea to discuss when on the topic of vision is each person’s thoughts on an exit for the business venture and the timespan they see to get there.
One thing to note about the informal section of a founder’s agreement is that it is not set in stone. As with all personal agreements, it should evolve over time as the relationship and trust grows among partners.Why it is important:
65% of all high-potential startups fail due to co-founder conflict. By discussing and creating a founders’ agreement before starting, it helps partners assess co-founder fit before beginning a venture and can aid in both future conflicts / prevents partners sinking time into a co-founder relationship that may be doomed to fail.
At worst, it allows you and your partner to have a conversation and align on your future vision, while at best, it will either save you time and energy or be a guide for any future disputes you have with your co-founder.
Related topics I will cover in future weeks:
Co-founder FitEquity and VestingVenture CapitalExits for Startups