Pre-Incorporation Founder Agreements

Myself and plenty of other startup attorneys and advisors have repeatedly advised the entrepreneurial community of the wisdom of co-founders getting the basics of their relationship down in agreement. Formally, this is done through the incorporation or LLC/partnership formation process, but founders should ideally come to some sort of agreement when they first start to work together. This is often the idea stage, before entrepreneurs know whether they have a valid product or business model. Not many entrepreneurs want to take on the time and expense of company formation before they even know whether they have a viable company. However, important issues still need to be settled when you start to work together with other entrepreneurs on an idea, including who will be contributing what time and/or funds to the development of the business idea or product, how decisions will be made amongst yourselves, and ownership of the fruits of your development (IP). This is especially important, since many entrepreneurs work on different ideas with different teams until an idea takes off into a potentially viable business, at which point they may decide to focus all their time and effort on that particular venture and have to leave the other ideas and teams they may be working with. Having an agreement from the get-go can resolve many issues that situations such as this creates, as well as the unfortunate situations where co-founders may end up getting cut out of the lucrative end of business ventures or where early-departed collaborators who contributed little to the final product seek to cash in on the work of the rest of the team. Putting the basic terms on paper early can avoid “he said, she said” later. And if you do decide to move forward with company formation, an agreement can provide a good roadmap for your attorney to structure the company. A New York law firm, McCormick & O’Brien, recently came up with a good template for an agreement they call a Founder Accord. McCormick & O’Brien’s template hits on many of the important issues founders should decide on when they begin working together, such as the equity split (and methods for altering said split based on vesting, milestones, or changing contributions, responsibilities, and roles), expected time and/or financial contributions, IP ownership, and management and decision-making mechanisms. Founders are also allowed to develop new categories in the Accord to address any additional concerns particular to the founders or their venture. Of course, the Accord does not take the place of formal company formation, and for liability and tax purposes the founders may be considered to be in a partnership, fully personally liable for the activities of the venture.

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