Founders Agreements: the Basics

Start-up businesses and their founders often pay too little attention to agreements about how the business will operate and how founders will go into business and operate together, and eventually terminate the business relationship. This often proves to be a big mistake, because business relationships, like others, often go sour for reasons good and bad. A “founders agreement” is intended to address these issues by clarifying and memorializing the parties’ intent and expectations.

A “founder” in this context is typically any individual who takes part in the business formation and will be involved going forward, once the business begins operating. A founders agreement will typically address:

• Founders’ ownership, e.g., in the form of founders’ shareholdings – the founders’ respective shareholdings most basically reflects what each will see as a return on their involvement and work on behalf of the business.  This can be difficult, since contributions can be difficult to quantity – founders can provide varying degrees of expertise, time, and money.

• Changes to founders group – the agreement should address the ways in which a founder may voluntarily or involuntarily resign from the business, the resigning founder’s financial rights and obligations, and how any resignation will impact going-forward business operations.

• Vesting – Vesting establishes when share holders have a legal right to their respective ownership. This requires discussion regarding not just the vesting schedule, but the treatment of terminating founders.

• Management – Founders will need to make routine, day-to-day decisions along with those with longer term implications such as incurring debt, bringing in new investors, or ending the business. A founders agreement can establish that certain decisions require unanimity among the founders and delegate business functions to one or more founders.

• Fiduciary duties – Founders agreements typically establish that each founder owes a fiduciary obligation to the business, which contemplates that founders will not participate or profit from competing businesses or opportunities, or which would tend to hurt the business, absent some form of consent.

• Confidentiality – Many businesses rely upon commercially sensitive information that founders mutually expect will be kept confidential. The nature and scope of the confidential information to be protected depends upon all aspects of the business and how it intends to make money. Any confidentiality provision in a founders agreement must therefore be carefully drafted to reflect the founders’ unique concerns.

This content is provided as background and does not constitute legal advice.  The attorneys at our firm have many years of experience advising small businesses and start-ups. For more information or to schedule a free consultation, contact us at info@lalorattorneys.com / 646.818.9870.