One crucial document that lays the foundation for a smooth and successful entrepreneurial journey is the founders’ agreement—do you have one yet? If you are yet to create a founders’ agreement or are unfamiliar with what they should include—you can’t afford to miss the rest of this post.
Introduction to a Founders’ Agreement
In this article, we’ll explore what a founders’ agreement is. Further, we’ll discuss why it’s essential, the key elements it should include, and how to clearly define the responsibilities of members and managers for these agreements.
What is a Founders’ Agreement?
A founders’ agreement is a legal document—it outlines the terms and conditions of the relationship between the founders of a business.
As for what it covers, this includes many things:
- Roles and responsibilities
- Decision-making processes
- Dispute resolution
Then, in terms of who the term “founder” can apply to, this can include any combination of being an owner, manager, or employee role in any company.
Why a Founders’ Agreement is Essential for Success
For several reasons, a founders’ agreement is crucial for a business’s success. It establishes clear expectations and responsibilities among co-founders, preventing conflicts and misunderstandings.
It also serves as a roadmap for the company’s growth. Founders can use it to attract investors and partners by demonstrating professionalism and commitment.
And finally, it safeguards the founders’ interests, ensuring fair recognition and compensation for their contributions.
This post also discusses choosing the best business entity for your startup.
What a Founders’ Agreement Should Include
Here are the core areas a founders’ agreement should consider.
Division of Ownership (Ownership)
From the outset, the founders must consider how they plan to split the ownership. Will it be based on financial contributions, product development, or a contribution of services (the proverbial sweat equity)? This should be one of the first conversations they have with one another.
When deciding on the value of a contribution made by a founder to an organization, carefully consider the nature and weight of the payment.
After all, not all gifts are of equal value. So, it’s necessary to accurately reflect the value of any non-cash contributions in the company’s minutes. This can help ensure the organization recognizes and values all founders’ contributions.
Remember, a founder’s worth to the company may alter over time.
This may be the result of several things, including:
- Modifications in the market
- The success of the business financially
- Position of the founder inside the company
As such, the value of each founder’s contribution should be constantly reviewed and assessed. The founders should make any necessary adjustments to reflect changes and ensure the distribution of ownership and responsibilities remains fair and equal.
Remembering this can help prevent disagreements or misunderstandings and ensure your company’s continued success.
How to Identify Division of Ownership in a Founders’ Agreement
In a founders’ agreement, the division of ownership among the founders should be identified and described.
For example, this typically includes:
- The percentage of ownership each founder holds
- Vesting schedules
- Other conditions that may affect the founders’ rights
It’s helpful to utilize the services of a tax lawyer or CPA to assist the founders in accurately identifying the contributions.
Identifying the Division of Ownership in a Founders’ Agreement
In a founders’ agreement, there are several ways to identify the division of ownership, including:
1. Equal ownership
In this scenario, each founder holds a similar percentage of ownership in the business. This can be a good option if the founders contribute equally to the company and have a strong working relationship.
2. Differentiated ownership
In this scenario, the founders have different percentages of ownership based on their contributions to the business. For example, a founder who has provided most of the initial capital may have a more significant share percentage of ownership than a founder who has contributed time and expertise.
3. Vesting schedule
A vesting schedule outlines the timeline over which a founder’s ownership in the business will vest or become wholly owned. This can incentivize founders to stay with the company and contribute to its long-term growth.
Division of Responsibility (Management)
The division of responsibilities among the founders of a business is an essential aspect of the company’s operation and can significantly impact its success. After all, founders often have different skills, expertise, and interests.
So, clearly define and allocate responsibilities to leverage these strengths and enable the members to work effectively as a founding team.
Key Management Positions in Business
Now that we’ve discussed the importance of dividing responsibilities among the founders of a business, let’s take a closer look at the key management positions typically found in a company.
Chief Executive Officer
Since they are often the driving force behind a company organization’s success, CEO positions are frequently highly sought after. The CEO, who serves as the company’s chief executive officer, oversees increasing the value of the enterprise.
Chief Financial Officer
Consider becoming a CFO rather than a CEO if you have solid financial judgment and prefer working with statistics over people. In this position, you will still need to communicate well with others. Still, your work will mainly emphasize financial issues, such as evaluating financial risk and managing the company’s resources.
Chief Operating Officer
The duties of the Chief Operating Officer (COO), a multidimensional role, differ depending on the organization. The COO is often responsible for managing the company’s day-to-day operations and ensuring everything functions well.
The president is often a high-level executive in a business organization who manages all aspects of the corporation. Setting strategic goals and objectives, controlling financial resources, and managing the business management team are a few examples.
The vice president is often a senior executive who supports the president or CEO in managing the business in a corporate setting. As for their responsibilities, these will change based on the needs and objectives of the organization, and they could be specified in a job description or other company policies.
The secretary usually handles and keeps track of the organization’s administrative activities in a business setting. This may entail taking calls, setting up meetings, creating paperwork, and managing mail for the business.
The treasurer at a business organization is typically in charge of managing the company’s financial assets. For example, its budget, investments, and cash flow. The treasurer can also create financial reports, anticipate future results, and plan financial moves.
How to Identify Division of Responsibilities in a Founders’ Agreement
There are a few different ways to identify the division of responsibilities in a founders’ agreement, including:
- Specific roles
- Shared responsibilities
- Exit rights
Remember to carefully consider the division of responsibilities among the founders and ensure you clearly outline them in their agreement. This helps avoid misunderstandings and conflicts down the line and ensures you run the business efficiently and effectively.
Don’t miss this next article on how to create a partnership if that’s your business structure.
The Different Types of Founders’ Agreements
Finally, let’s review three primary types of founders’ agreements: partnership agreements, operating agreements, and bylaws.
These are for partnerships and outline the responsibilities of partners, profit and loss division, management, and decision-making processes. They serve as a guide for the partnership’s growth and can be modified as needed.
These agreements are for Limited Liability Companies (LLCs) and define the responsibilities of members and managers and financial and operational procedures. Similar to partnership agreements, they provide clarity, and you can modify them as the business evolves.
Finally, these are for corporations. They establish rules and regulations for:
- Internal affairs
- Responsibilities of officers and directors
- Meeting processes
- Decision-making procedures
You can revise bylaws to ensure proper governance and compliance as the corporation’s needs change.
Each of these agreements plays a vital role in shaping the functioning and success of their respective business structures. Be sure to enter into any agreement, including a business partnership, with careful consideration and expert legal guidance.
Do you want to talk more about creating the appropriate founders’ agreement for your own business venture? Contact the Denver business lawyers at Contiguglia Law today.
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