Why is Founder’s Agreement a Necessity for a Start-up?

Why is Founder’s Agreement a Necessity for a Start-up?

Understanding the term Founder’s Agreement in India, it should be kept in mind that it is non-other than a simple contract, which we enter with any other person in day-to-day life or in daily routine. Founder’s Agreement in India is governed by the very basic principles of Contract Law (Indian Contract Act, 1872) and specially these Founder’s Agreement are formatted by lawyers, with great precision keeping the above-mentioned law in mind.

Founder’s Agreement is formally defined as,

“A clear agreement between founders on a number of key issues that their business might face.”

Furthermore, we may associate the necessity of a general contract with that of the Founder’s Agreement drafted by lawyers. This simply means, that a Founder’s Agreement generated by lawyers have all the important aspects that of a general contract, but moreover, it counts for the other benefits which is a necessary nowadays to keep in mind to start a business venture. Following are those additional and specific benefits of the Founder’s Agreement Format by lawyers:

  1. Outlines roles and responsibilities of Co-founders.

As it is said that, assurance is uncertain and you cannot be always present to look after your business. So, it is necessary to describe roles and responsibilities of each of the founders so that your business can run smoothly and also limits each one’s responsibility which this instrument ensures.

For example, it can specify one member to be in charge of the operations while the other is in charge of major decision-making process. Sometimes, you will disagree with your partner and at that time, founder’s agreement drafted will show to whom you have given final decision-making power. And it is necessary for all the co-founders to avoid escalation of conflicts in their business, because small grievances can lead the venture into the risk of dissolution or winding-up.

  1. Shows Percentage or Shares of Equity held by the Co-founders.

It is a proven fact that, the founders of the company will allocate and provide different amounts of money and time into the business. The agreement should state clearly the ownership strategy of the business and how it can evolve over time, so that any future disagreement on behalf of this could be prevented.

The best agreement is that which aligns the business success with the financial success of the company. It is necessary for you to avoid such circumstances, where it is noted that the business is making huge profits, and you as well as other co-founders end up in conflicts deciding, how much each one of the founders will receive. Because, a good agreement and a successful business should render profits to the founders in proportion to their contribution in the share-capital or resources to the firm.

  1. Lays down procedure to leave or exit the organisation.

The base of the founder’s agreement format by lawyers is that, it lays down accurate object, aim and exit strategy for the co-founders of the Business they opted to set-up. Generally, no one will like to think about exiting the start-up when it is time to start the business. But, you cannot predict the future situations and what these circumstances needed to get resolved. So, to counter this adverse situation you should put straight forward procedures which could be followed if anyone of you would like to exit.

This is necessary to avoid ambiguities where people with varying opinions will exit the company at the time, when you need them or their exit will lead to unbearable losses in your business.

  1. Intellectual Property Rights are recognised and reserved.

The intellectual property developed by the company or for the company should be explicitly assigned in the name of the enterprise. You should avoid making mistakes of assigning intellectual property right, especially copyright ownership to individuals. Because, if one of you decided to part way with the business, and you had assigned the intellectual property or your business to his name, then he will render your start-up less useful in operation, stressing upon that fact, he may use it in his other endeavours and can make you culprit of Intellectual Property Right infringement.

Thus, always use Founder’s agreement format by lawyers and ensure that your intellectual property is safeguarded under your business’s name.

  1. Sales/Mergers/Material Transactions

Many a times you will come across various unpredictable offers. It will be easy for you to take advantage of such new offers which includes material transactions or mergers.

So, if you have clearly indicated under your founder’s agreement the way and procedure for merger or to carry out any future transactions so same kind, which will affect the working of your business, will make it easy for you to process such change and to adapt the same.

  1. Allows alternative dispute resolution methods to counter legal claims.

The most famous dispute resolution technique which is nowadays incorporated in the Founder’s Agreement Format made by lawyers is of Arbitration and Conciliation Clause. It provides for a better opportunity to take the case before the neutral arbitrator appointed by the parties to such case, and helps it deciding without getting into the usual formal and delayed procedures of regular courts of law.

Therefore, it is necessary for every person to enter into a founder’s agreement if he wishes to establish a start-up and this condition is not in itself sufficient, until your founder’s agreement is not in lieu with the format prescribed by lawyers. Hence, take the help of an expert to prepare this and Company Vakil is always there to make your way easy in this respect. To know more about this, please refer to the Founder’s Agreement Drafting Services of Company Vakil and get your Founders Agreement Drafted today.

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