Free founders agreements: a guide for UK startups

Founders agreements are one of the most important legal documents when you start a new venture. But many of the founders we talk to put off creating a founders agreement, thinking it’s just a time-sucking formality without any teeth.

Actually, it’s mission critical for early stage companies to have this important contract in place – for founders, the company itself and future investors.

We feel so strongly about the importance of founders agreements that we’ve made them completely free to create on SeedLegals. It’s one of several essential legal documents you can access as part of our 7-day free trial.

In this post, we’ll explain what founders agreements are, why you need one, how to create one and the terms to include.

• What is a founders agreement?
• Why is it important to have a founders agreement?
• Who should sign the founders agreement?
• Is a founders agreement legally binding?
• What’s the difference between a founders agreement and a shareholders agreement?
• What terms do I need to cover in my founders agreement?
• How do you create a founders agreement?
• Ready to get started?

What is a founders agreement?

A founders agreement lists a set of obligations that company founders have to each other and the company. It details their roles, responsibilities, salary, equity compensation and more.

There are two main types, designed for startups at different stages:

‍1) Founders Pledge – for founders who are pre-salary and pre-funding

2) Founders Service Agreement – for founders to sign at the point where they start paying themselves a salary or before the first funding round, whichever comes first

Why is it important to have a founders agreement?

Founders agreements clarify and formalise the relationship between the founders and the company, including roles, responsibilities and remuneration.

Most startups begin in a burst of energy and ambition from the founders. No matter how tight-knit and committed you all are at the beginning, it’s worth putting founders agreements in place to protect your company from worst-case scenarios. A founders agreement helps you navigate tough situations and answer important questions, such as:

• If someone leaves later on, what happens to their shares? What happens to their voting power?
• Who actually owns the IP that your startup depends on?
• What power do you have to remove a co-founder if they’re acting against the company’s best interests?

You should make sure you have a Founders Pledge signed as soon as possible after you register your company. At this stage, you’re probably not paying yourselves a salary, and the Founders Pledge details how company equity is distributed among the founding team.

When your company has grown to the point where you can pay yourself a salary or you’re about to raise a funding round (whichever comes first), you’ll need to upgrade to a Founders Service Agreement. This more detailed agreement is the Founders Pledge plus an employment agreement. As well as detailing what happens in case the founders fall out or leave, it also lays out the founder’s entitlements to pay and time off.

Founders agreements are crucial early documents that map out how the company is run and how it’s protected if a founder isn’t acting in its best interests. Whether you’re planning to raise external funding or not, it’s still important to protect your startup through proper IP assignment, confidentiality clauses and equity vesting terms. And if you are planning to raise funding, as part of your investors’ due diligence, they’ll expect to see high quality founders agreements in place.

Who should sign the founders agreement?

All company founders should sign one, including the original founder(s), and new co-founders when they join. Even if you’re the sole founder, you should still sign to show that you’re serious about protecting your company’s long-term health.

Is a founders agreement legally binding?

If the document is well drafted and signed by the correct parties, a founders agreement is legally binding. The quality of free founders agreements you find online varies greatly. Make sure you’re using a reputable template – like the documents you can find on SeedLegals – to properly protect your company.

What’s the difference between a founders agreement and a shareholders agreement?

A founders agreement is a contract between the co-founders of a company that outlines their rights and obligations, while a shareholders agreement is a contract between the shareholders of a company that outlines their relationship with each other and the company. The former focuses on the founders’ relationship, while the latter focuses on the shareholders’ relationship.

You only need a shareholders agreement after you onboard new investors during a funding round. Before then, the founders agreements are enough to cover how the current shareholders (ie, the founders) can act.

What terms do I need to cover in my founders agreement?

1. Roles and responsibilities to the company‍

CEO or CTO? The founders agreement will cover day-to-day tasks and determine whether they’re also a director of the company, which comes with its own set of responsibilities. You should also declare any external business interests that might conflict with your ability to work at the company (such as running a separate business in tandem).

2. Salary and working schedule (Founders Service Agreement only)‍

The Founders Service Agreement outlines holiday days, how sick leave is handled and whether there’s a notice period.

3. Equity compensation and vesting

Founders usually own a substantial percentage of the company as shares, and founder agreements lay out how the share ownership structure works.

Often founder shares are subject to reverse-vesting. This means the shares are allotted upfront but they are ‘earned’ over a period of years (most commonly, 3 or 4 years). If the founder leaves before the vesting period ends, they have to return the equity they haven’t yet earned.

A vesting schedule prevents co-founders from leaving the company early with a large chunk of company equity.

4. Founder restrictions‍

Founders agreements often include non-compete restrictions on whether the founders can start or work for a competing business. This means that if a co-founder leaves on bad terms, they can’t take your startup’s secrets to your biggest rival.

How do you create a founders agreement?

There are plenty of founders agreement templates out there you could use. But beware of a one-size-fits-all approach. Your startup, and the collective skills and experience of your founding team, is unique. It’s worth investing the time in creating a founders agreement that is tailored to exactly what you need.

That’s where SeedLegals comes in. We combine the speed and efficiency of an online template, with the legal heft of an in-house lawyer. Our documents are drafted and regularly reviewed by our legal team and our online workflow makes it quick and easy to understand and choose the right terms for your startup.

In just a few minutes, you’ll have a complete, correctly worded document ready to sign. And if you have any questions along the way, our friendly team of experts is ready to help.

How to create a founders agreement on SeedLegals:

• Log into SeedLegals or sign up to start your free trial
• On the left-hand menu, go to Team
• Click + Add team member in the top-right corner, choose Founder
• Add the founder’s details, click continue
• Click + New agreement, choose Founder agreement
  – To create a Founder Pledge, enter 0 in the box for salary
  – To create a Founder Service Agreement, enter a number above 0 for salary
• Set the terms you want across:
  – Key terms
  – Role & competing interests
  – Equity
  – Founder restrictions
  – Additional items
• Share and sign online – it’s that easy

Ready to get started?

On SeedLegals, it’s quick and simple to create the documents you need to protect your startup.

We think early-stage businesses shouldn’t be overcharged for their fundamental legal docs. That’s why we’ve bundled together the tools and contracts you need into a best value membership plan. To check out what you get, see SeedLegals membership: what’s included.

Got a question for us? Jump on a free call with one of our experts.

If you’re raring to go and ready to create your founder agreements right now, hit the button below to start your free trial.