How to Draft an Effective Founders' Agreement A comprehensive founders' agreement will help all parties stay aligned, fulfill responsibilities and avoid disputes.
By Patrick Frank Edited by Amanda Breen
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Things can move very quickly when you're a startup. There are big decisions to be made every day, and it's tempting to cut corners before the groundwork has been laid. There are so many practical issues to attend to as a new company that it's easy to overlook the interpersonal matters. Decisions often lead to differing opinions, and differing opinions can lead to conflict. Fortunately, conflicts and communication disputes can be mitigated by drafting a founders' agreement in the early startup stage.
What is a founders' agreement?
Simply put, a founders' agreement is a document — and once a company is far enough along, a legal one — that outlines all of the questions you need answered for your business in regards to ownership, roles, expectations and potential disputes. It is a contract of obligations for you and your business partners to ensure you are on the same page, addressing all of the "what ifs." Starting a business in many cases is just as serious and sometimes even more complex than marriage — so like a marriage, you want to make sure you are prepared and choose the right individual(s) to make your partner or partners. By setting aside the time to create a founders' agreement, you can address all of the unknowns that may present issues further down the road. Better to address it out of the gate rather than down line when things get more complex.
How to create your first draft
The key to writing a successful first draft is to keep it simple. It's important to avoid overcomplicating the initial agreement because in the early stages of your company, you simply need to get on the same page as your partners. Rather than focus on the legal jargon and structure of the document, prioritize having the right questions and document responses in short answers from each party.
Additionally, instead of using long-form sentences, stick to bullet points with one-to-two-line answers for each party. Not only will it make the agreement easy to read, address and understand, but it also helps people prioritize their answers. It also helps prepare for an easy transition when a legal team steps in to look at the document and make a more official version of the first draft.
Related: The 3 Essential Things Needed in a Founders' Agreement
A founders' agreement draft should include four key sections.
1. Ownership
This section should lay out the details that will eventually become legally binding. It will include financial contributions, company-ownership percentages, shares and how costs and revenue will be split between owners or if it goes back into the business. It will also outline how much money needs to be made before owners can withdraw money from the company. Don't automatically assume it will be an even split before addressing details with your partners. Putting in clauses to revisit this discussion can help any unforeseen changes that happen with time.
2. Responsibilities and departments
Founders wear many hats when they start a company, but eventually, everyone will need to have a defined role. What will each person contribute to the company? What are his or her job descriptions, duties, hour commitments and responsibilities? How will the company be divided into departments? How does the company handle suggestions by external parties regarding roles and responsibilities? Failing to outline who does what and where within the company can quickly lead to overlap and butting heads. It's better to clear it up early than step on toes later down the line. It also helps make your company appear less like a scrappy startup and more like a fully fledged business.
Related: The Top 7 Legal Documents for Every Startup
3. Dispute resolution and dissolution
Starting a company is just like any other relationship. There are going to be arguments and disagreements. The important thing is to plan conflict strategies for situations that occur, especially for the ones you don't even know could occur (trust me they will happen). Even with your closest business associates, resolving disputes can be difficult without a point of reference because the last thing that anyone wants to happen is getting third or fourth parties involved. You may decide to list key stakeholders as arbitrators that can help tip the scale by having an unbiased opinion. Legal should always be your last option, but you determine the steps you and your partners would take in order. Think of it as a decision pyramid: simplest first, worst last.
In some circumstances, you may decide to dissolve the company. This won't necessarily stem from a dispute — it could be financial, logistical or personal. But it is another circumstance that can get messy if not planned for properly. It's better to explore all eventualities before they occur than to be caught off guard. No matter how negative and unpleasant it may be, always prepare for the worst and have a plan for it. If the ship is sinking, it is always safer to have a lifeboat.
4. Miscellaneous and what ifs
Your whole founders' agreement is essentially a list of "what ifs." You can't plan for every circumstance, but you can do your best to anticipate the questions or situations that will inevitably arise. What are the partners' vacation expectations? Are they pro remote working? What will the company culture look like? How will the partners approach each other if someone is not pulling his or her weight? If someone makes a huge error, how will this be addressed? You can even be transparent about your biggest concerns about the other partner. This is the opportunity to address the uncomfortable things. If you have thought about it, had a fight about it with someone else or ever had an issue with it in the workplace, include it. Anything and everything is on the table.
Related: 6 Strategies to Resolve Conflict at Work
Things to remember
I have learned a lot about the delicate dynamics of founders' relationships over the years. It's why I'm launching my own digital interactive founders' agreement. It can be tricky to get the ball rolling in the first place. When creating a founders' agreement, the priority is to get honest answers. It sets the foundation for the future of the company, meaning it's the perfect time to be honest with one another. Don't shy away from potential clashes with your partners — after all, this is the time to get everything out on the table. It may lead to disagreements, but it's not a bad thing. Better to disagree now rather than later down the line, as it could benefit you to find out early that they may not be the best fit.
Your founders' agreement, once finalized, will be a resource to refer back to throughout the whole timeline of your company. It will help all parties stay aligned, fulfill responsibilities and avoid disputes. That way, you can put all your energy into striving for growth and progress.
