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Founders Agreement in a startup. What does it consist of?

Benefits of writing a founders’ agreement

A founders’ agreement is written for bad times, i.e. it is an excellent form of protection if a dispute arises between the partners. It then becomes a defense tool for each party. It is also important that a founders agreement should be entered into whenever any action is taken with money.

What are the types of formation agreements?

Types of founding agreements include:

  • pre-formation founders – that is, founders’ agreements made at the initial stage of the project, when the project proponents have not yet formed the company that would be the vehicle for the project’s development,
  • Shareholders agreement – agreements concluded between founders who have already established a company and intend to regulate the project process within such a company.

Elements of founders’ agreement. Who may conclude it?

The following elements may not be missing from the founding agreement:

  • The division of shares,
  • Business purpose and objectives,
  • Profit distribution,
  • Loss sharing/financing of the company,
  • Roles and responsibilities of individual shareholders,
  • Vesting and reverse vesting,
  • Employee shares,
  • Copyrights and intellectual property,
  • Investor entry,
  • Exit plan.

Who can enter into such an agreement? Literally any person who is a partner of the company. Although the Founders Agreement applies only to founders, in practice it also covers partners joining the company later. At the same time, the founders’ agreement is very similar to the investment agreement – both belong to the same category of agreements, i.e. secret agreements between a group of people who plan a joint business.

The best time to conclude a founders’ agreement is when the founders decide to take joint actions and establish the main assumptions. Of course, the sooner it is concluded, the better. Nonetheless, the Founders Agreement may be drawn up while the company is already operating, although in this form it will be slightly different from the document created before the company’s foundation.

The form of signing the Founders Agreement and changes to its content

When it comes to establishing a limited liability company, the best option is a contract with notarized signatures. However, many founders limit themselves to a simple written form. Of course, it will be valid, but its disadvantage is that it is impossible to claim effective disposal of shares. According to the Code of Commercial Companies, the disposition of shares must be made in a document with notarized signatures. This type of certification does not cost too much and has a significant, positive impact on the situation of all shareholders.

What about changes or updates to the Founders Agreement? You can make them – after all, many modifications and new ideas will arise during the course of the partnership, making an update of the agreement necessary. What’s more, it’s a good idea to revisit the Founders Agreement on an ongoing basis and remove outdated issues while introducing completely new arrangements.

Is the articles of incorporation an alternative to the partnership agreement?

No – the articles of incorporation are not the articles of association. The latter form requires a separate agreement to be drawn up in accordance with the provisions of the Code of Commercial Companies. Besides, if the activity has the signs of a business activity and there is no incorporation of a company, some tax authorities may try to prove that it is a civil partnership. This type of situation occurs against the will of the partners, so it is advisable to set up a company as soon as the articles of association have been drawn up and concluded.

Top 5 common mistakes with Founders Agreements

  1. Founder hostility – these are situations where the founders seek to protect numerous contractual provisions with contractual penalties or require that the agreement regulate the decision-making process in a strict manner. Unfortunately, this can spoil the relationship between the founders and damage their mutual trust.
  2. Civil partnership – it happens that the content of the founders’ agreement results in concluding a civil partnership agreement between the founders, which entails far-reaching legal consequences. It is best, therefore, to include in the founders’ agreement provisions explicitly excluding the application of civil law partnership regulations to the agreement.
  3. Looking too far into the future – paying too much attention to negotiations concerning profit and the possibility of selling the shares in the future, while forgetting about basic issues, such as division of responsibilities or securing IP.
  4. Lack ofthe nature of a preliminary agreement – a huge number of founding agreements do not contain obligations that are in the nature of a preliminary agreement, especially with regard to obligations to enter into a company agreement in the future and to transfer all IP held to that company.
  5. Lack of tools that impose an obligation of active participation on other founders – it happens that founding agreements are limited only to determining the size of shares in the future venture, but do not take into account the sanctions that will be applied to a partner who turns out to be completely passive in the development of the venture.

Author: Marcin Staniszewski, RPMS Staniszewski & Partners law firm

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