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If you have seen the movie,The Social Network’, you would remember the scene where an enraged Eduardo Saverin (played by Andrew Garfield) storms into the building and demands a clarification from Mark Zuckerberg, the CEO, when he comes to know that his shares in Facebook, the social media website he co-founded, have been diluted from 34% to 0.03%. 

Following this, his name is removed as co-founder from the Facebook masthead.

 

What are the reasons that start-ups fail(Facebook being an exception)?Sure, there are some that build a product no one uses or some simply run out of money, but there’s another important aspect- the conflict between founders, which can be a hurdle in the growth of a start-up.

Running a start-up is a multi-dimensional activity. You could have that golden, once-in-a-lifetime idea but if the other parts; for example, the legal aspect is not taken care of properly, it could hamper the chances of success for your start-up. If your start-up has multiple co-founders, it is important to draw up, what you call a ‘founder’s agreement.’

 In an article for the Financial Times in 2017, Brian Groom advised founders to draw up a founder’s agreement and sign it. While talking to co-founders of different ventures, Groom was told that a lot of these start-ups survived due to the founder’s agreement. He further adds that lawyers who have worked with such founders recommend signing a founder’s agreement in advance, if they happen to be married, have familial or friendly relations.

 

What does a founder’s agreement contain?

Firstly, you should specify what type of business you are planning to start, what are the objectives of this business and the direction all the co-founders want to take the company in. It is therefore, important to mutually discuss and mention the goals you are trying to achieve with the business.

 

So what does a founder’s agreement further cover? Let us have a look at the various parts of a founder’s agreement –

 

  1. Roles and Responsibilities

A founder, usually cannot be good at every aspect of the business. As the captain of the ship, it is important for each founder to take up various aspects like marketing, sales, legal, operations and HR. The CEO is the one who coordinates the efforts of each department to achieve the business’ goals. Delegating roles and defining what is desired of them in those roles, helps them make clearer decisions. It further helps avoid chaos and redundancy.

 

  1. Decision-making

Should you spend more on marketing or should the company focus more on product development? Should the company expand or cut down on the number of employees? These are critical questions that need the co-founders to be on the same page at all times.

Having clauses and the ability to take decisions through independent or mutual voting procedure are some of the important things to consider when drawing up a founder’s agreement.

 

  1. Functional Hierarchy

In case of any conflict, the domain in which the conflict exists should be addressed by the founder concerned.

 

  1. Arbitration Clause+ Departure

In case the conflict cannot be resolved through mutual agreement, the arbitration clause comes into the picture. Further, in case of a founder leaving the company, the departure clause should specify if the company has the right to buyback his shares and give it to another co-founder.

 

  1. Firing

It is difficult for partners in a situation where the firing of a fellow co-founder is in question. It is therefore, imperative that they draw up a firing clause where any offence/ circumstances mentioned leads to the firing of the founder in question. It includes offences like sexual misconduct, misappropriation of funds or taking up alternative employment, etc.

 

  1. Distribution of Equity

The distribution of equity in the company should be fair and just and should be able to equally reward the efforts of the founders in achieving the goals set by the business. The co-founders should agree to and be satisfied about the amount of equity being handed over to them.

 

  1. Distribution of Intellectual Property

Whatever intellectual property the business entity creates during its lifetime are a part of intellectual property- logos, brandings, marketing plans, products and services; should be assigned in the name of the company rather than in the name of an individual.

 

 

 

These were some of the points that should be mentioned in the Founder’s agreement and are a vital aspect to look upon at, when launching your own start-up.

A founders’ agreement tends to be overlooked as something that isn’t the most crucial part of being an entrepreneur, but it’s incredibly important. You’ll not only learn a lot about the business and your co-founders, but yourself along the way too.

 

 

 

 

Authored by Manan Trivedi,Head of  Content(StartUp Monk)

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CIN- U74999DL2019PTC347107