What You Should Be Including In Your Founders’, Shareholders’, or Operating Agreement

We’ve seen famous cases of successful startups who’ve become big companies have issues involving former co-founders or collaborators who left or are ousted from the company in the early stages wanting to be compensated for their often-critical contributions to the company’s product or service — the issue arises when the company didn’t have proper agreements in place to govern the relationship between the founders. These agreements can take different forms depending on the legal structure of a company — whether the document is a simple “founders’ agreement” when the startup is unincorporated/non-organized, a shareholders’ agreement when the company is a corporation, or an operating agreement if the company is a LLC. However a startup is organized, and whatever form or name a document takes, the founders of any startup should have an agreement in place spelling out their rights and responsibilities to one another and to the startup, which should minimize disputes in the event things go wrong in the founder relationship. There are a number of terms and provisions that should be included in your agreement with your co-founders. Among these terms and provisions are: – Co-founder roles and responsibilities: What role is each founder going to take; what are their responsibilities and their deliverables? – Equity split and vesting: Obviously equity will need to be split when the company is legally formed, but the split can also be decided upon in an agreement made before company formation. Additionally, vesting can be decided upon when the equity split is made, based on time spent with the company, goals or deliverables met, etc. – Co-founder exit and removal, and contingencies for disability and death: Importantly, what is the process by which a co-founder can be removed, and what is a co-founder entitled to if he or she is removed, or voluntarily resigns from the startup? Also, what is the procedure in the event of an emergency that renders a co-founder temporarily or permanently unable to work on the company? – Capital and other contributions: What is each co-founder contributing? – IP assignments: Co-founders should be assigning the IP related to their work for the startup to the company — many conflicts arise because a departed co-founder asserts an interest in the IP being used by the startup. – Management and voting: How are both day-to-day and important strategic decisions being made? The earlier these types of agreements are completed, the better — not only can more issues be resolved at an earlier stage, but it is better to decide how potential issues are to be resolved when the co-founders still (presumably) have an amicable relationship. Ideally, you and your co-founders should be consulting with a business or corporate attorney, who can advise you on different or additional terms that your particular team and startup may need in its agreements, and can help you and your fellow co-founders work through the decision-making process in deciding the precise terms of your agreement.

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