Founders' agreements are the most first important docs to sign when you start a new venture.
That’s why at SeedLegals, we’ve made it free for startups to create founders' agreements as part of our 30 day trial. Create yours now by setting up a free SeedLegals account.
Here’s more on what founders' agreements are, and why it’s mission critical for early stage companies to have them in place:
What is a founders agreement?
A founders' agreement is a set of obligations company founders have to each other and the company, detailing 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 once they start paying themselves a salary or before the first funding round, whichever is sooner.
When do you need a founders agreement?
A Founders Pledge should be signed as soon as possible after incorporation. It is especially important to clarify the relationship between themselves and their company at this stage since in all likelihood they aren’t paying themselves a salary, and details of how company equity is distributed between them needs to be clarified.
Following which, a Founders Service Agreement will need to be created once the founders start paying themselves a salary, which is usually after the first round of funding. Investors look for this as part of their due diligence.
Not sure which one you need? Read more on the difference between a Founders Pledge vs. Founders Service Agreement
Who should sign a founders agreement?
All company founders should sign one, including the original founder(s), and new co-founders when they join.
What should a founders agreement include?
1. Roles and responsibilities to the Company
Including day-to-day tasks and whether they’re also a Director of the company, which comes with its own set of responsibilities. In addition, any external business interests need to be declared (such as running a separate business in tandem).
2. Salary and working schedule (Founders Service Agreement only)
Similar to an employment contract, the Founders Service Agreement can be thought of an employment agreement between founders and ‘the company’. Holiday days, how sick leave is handled and details regarding notice period should all be outlined here.
3. Equity compensation and vesting
Founders usually own a substantial percent of the company as shares. If a founder joins later on, after the initial shares have been created and allocated, that founder may be given share options (or, as the Americans call them, Stock Options) instead of shares. You can specify here whether you'd like the founder agreement to allocate shares or share Options to the founder, and you can create an optional share vesting schedule to allocate those shares or options over a period of time, or when certain milestones are reached. This prevents co-founders from leaving the company with a large chunk of company equity leaving very little to give to future investors.
4. Founder restrictions
Similarly to a Non-compete Agreement, founders' agreements should include restrictions on whether the founders can start or work for a competing business.
Create your founders agreements now by creating a SeedLegals account.