Founders' Agreements: Why You Can't Afford Not to Have One

Founders' Agreements: Why You Can't Afford Not to Have One

 

One way to place both yourself and your startup business in a high-risk position is to wing it when it comes to formal agreements between you and your cofounder(s). I wrote a post last year on how to recover from a cofounder’s exit. This time I’d like to step back and focus on how to set things up correctly long before the relationship goes off the rails, your business strikes it rich, or you’re at odds over a major decision regarding the financial future of your business.

Founders’ agreements are an absolutely necessary piece of startup infrastructure, helping provide the foundation for a successful business. They set expectations, help guide decision-making, mitigate risk, and reassure investors that they’re not stepping into a mess.

 

Here’s what good founders’ agreements should cover:

Responsibilities and Decision-making

Ownership Interest

Exit Strategy

Founder Departures

Ownership of Intellectual Property

Sales/Mergers/Major Transactions

Company Dissolution

While you can easily find template founders’ agreements, take the time to have an attorney review one before you commit yourself to a legally binding agreement. It may seem like a cost that’s not worth incurring, but believe me, getting it right initially and catching any glaring omissions or obvious ambiguities will more than pay for itself down the road.

What other provisions should founders’ agreements include? Share your experience and ask us questions in the comments section below or contact Early Growth Financial Services for financial support with your startup fundraising.

David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.

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