startup founders

in Projects, Programming, Technology

Pre-incorporation founders’ agreements

A founders’ agreement is a document shared between startup partners that describes each person’s contribution and their ownership. The contribution may consist of work, money, customers, or intellectual property. A founder’s agreement sets expectations before a company is incorporated in order to avoid miscommunication.

I’m currently working on a couple of speculative projects where a non-trivial (more than a weekend) amount of unpaid work is necessary up-front to prove out the business. It’s important – especially when you’re working with new people – to flesh out everyone’s expectations in the beginning (and way easier than down the road). However, too much discussion is a waste of time before you’ve created a product that’s worth something. Here are some suggestions for writing an early-stage founder agreement.

Here are a few key questions to be answered.

  1. How much time and money will be invested by each founder?
  2. What are the specific roles and responsibilities of each founder?
  3. What is the scope of the Version 1 product we’re working towards, or hypotheses we’re testing?
  4. What is the definition of success? What outcome would keep each team member working on this project at the same or greater level of effort?

From there, you can negotiate.

  1. The percentage ownership split. What percentage will each founder get if the project is sold?
  2. The percentage profit split. What percentage of earnings will each founder get?
  3. How will decisions be made? Is there one CEO, or is a majority vote sufficient? Can a majority of founders kick out another founder?
  4. What happens if the project fails, there is a disagreement, or interest fizzles out? Who keeps the IP (code) and branding (name) – subject to the others buying it from them?

If your project is a success after you’ve reached the first big milestone, congrats (this is rare)! You should actually incorporate. Hopefully, all founders will be on good terms based on the expectations set at the beginning (and reasonable with the most-likely changed requirements and direction of the business). If you haven’t hit it out of the park, re-evaluate, re-negotiate, and take another shot (or move on).

Here is a free pre-incorporation founders example document that you can use as a starting point. For a more legal-looking document, try Seedcamp’s version, or an open-source founder’s agreement template.

Please leave a comment below if I’ve forgotten anything, or if you have another resource I should add to aid with founder agreements.

Aside: when researching this, I thought Startup Weekend surely must have a FAQ about this, and they do (in particular about IP and ownership). This is a great answer for a project where the initial investment is just a weekend.

While it doesn’t hurt to be clear about your individual expectations from the start, we’ve found that teams who don’t spend time addressing this issue until it actually matters (i.e., there is a tangible product to have ownership of) are much more productive and successful than those who do. – Startup Weekend

Related: Ideas are inevitable, why I don’t sign NDAs and laugh at stealth mode

Image courtesy of gettyimages.com

What do you think?

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  1. Assembly.com is a fascinating solution to this problem. It provides a framework for splitting up equity at a very granular level based on an individual’s contribution.

  2. That stuff seriously this really is an issue that’s frequently forgotten in my opinion.