March 8, 2016 by gamalm
The “Founders’ Agreement” or “Shareholders’ Agreement” is a legal document the founders of a company could choose to sign I order to avoid future problems arising from several operational problems. Although several startups feel no need to sign such an official document, we highly recommend BPC participants to do so. So they can avoid any future startup threatening problems.
The following are a few topics covered by the Founders’ Agreement:
- Roles & Duties
The distinction of roles and responsibilities in the official document merely represents Founder X’s main responsibility and does not restrict his duties beyond that point. This clause should help startups design an organizational structure that’s efficient as each founder has predetermined priorities. The roles assigned in the contract shouldn’t restrict any founder’s ability to perform other tasks as most startups will require founders who perform different roles in parallel.
- Voting & Decision-making
The founders can choose to allocate operational responsibilities based on voting or can choose for assigning one founder the whole responsibility. No matter the decision including the clause will help avoid any future conflicts over authority. The following topics should be addressed by the clause.
- Weight of each vote. Is voting power determined by equity or is it allocated based on occupation.
- Authority over hiring/firing of new employees.
- Purchase of Machines or Equipment. For example, some criteria could be set in which any purchase that exceeds 500 EGP in value should take place only after the approval of all founders.
- The decision of distributing vs reinvesting profits should have a clear voting structure.
- The most important decision that should be addressed is how can the shareholders vote on firing a cofounder. For example, one method is to rely on a milestone system supported by warnings on missed deadlines.
This simple question of who owns who owns how much has several layers that the founders should investigate before reaching an answer. The following methods could be used to allocate initial equity in the firm:
- The basic approach: dividing the equity equally on the number of founder who are involved in the starting the venture. The problem with this approach is although it’s the easiest to understand, it leaves room for unfairness as it does not factor in the different effort levels that each founder put into the venture.
- Capital/Contribution method: as a measure of addressing the fairness aspect of equity division founders might prefer this approach. This approach factors in non-monetary contributions as well as cash paid in. The following example is provided by Strtp.com and should help explain the concept.
Founder A brings to the firm the idea, a key design, and $20,000 of initial capital.
Founder B brings their willingness to work hard.
A greater proportion of the initial shares/units might be granted to Founder A, in compensation for the value of their idea, design, and money.
- Vestng: Unlike the previous approaches vesting does not grant the founder the ownership once the venture is fomed, instead Vesting gives a founder the right to buy shares in the company only after reaching a specified milestone. For instance, a founding team might decide to add a new memeber to the founding team to cover for their lack of expeirence in B2B sales, so instead of giving the new partner all of his shared up front they might decide to only grant him the ownership percentage after he proves his ability to grow their sales. The Vesting approach basically makes sure Founders are only rewarded with ownership after they have proven their ability to contribute. Although the approach is the most reliable in terms of assuring founders’ involvment in the operations applying this method onto your business might be challenging a it requires a strong structure of milestones and oversight.
Every Founders’ Agreement should be tailored to the startups industry and needs, we highly recommend that you consult with a legal expert before engaging in any legally binding agreements.
Provided By: 138 Pyramids