Exactly what is a Founder Agreement (FA)?
Whenever a start-up makes existence, it takes some rules between your founders/promoters of this company. “Founder Agreement” is really a contract that is attracted between your founders/promoters of the company on key issues with regard to company.
So why do we want it?
- To stipulate mutual understanding, responsibilities, legal rights and obligations of every party towards the FA and align their set goals.
- To keep track that will prevent ambiguities later on.
- To maintain allocation and distribution of sources.
When you should enter such agreement?
– During the time of tabling the concept
– During the time of incorporation
– During the time of capital.
Standard Terms & Conditions of the FA
- Equity Investment and Shareholding Structure: Who should hold just how much shares? Equity ought to be divided based on contribution of each one of the founders correspondingly.
- Board Management and Governance:The number of founders to be the Board and why? How the organization will be governed?
- Salary: Compute the salaries from the Founders as well as their increments.
- Roles & Responsibilities: Divide roles and responsibilities at the very top management.
- Shareholders’ Meeting: Frequency of conferences, approved individuals the conferences.
- Fresh Issue and Change in Shares: Issues for example Lock-in periods, founder selling his stakes, Right of First Refusal, transfer upon dying, etc.
- Approval of Financial obligations: What would be the procedure to approve action that might incur financial obligations to the organization?
- Appointment and Elimination of a Chief executive officer: It ought to be agreed regarding how founder(s) will appoint and take away the Chief executive officer.
- Vesting: Right of the organization to purchase back its shares upon some contingencies is pointed out.
- Confidentiality, Non-Compete and Non-solicit:A founder not to take part in any action (espionage, breach of confidentiality) with every other entity which may jeopardize or perhaps be adverse towards the company’s interests or would directly contend with the organization.
- Representation and Warranties: Founders are restricted from getting into every other contracts which may limit their obligation towards the organization as well as, prevent any 3rd party legal rights within the Ip from the founder(s)/company.
- Friendly Exit from business: A method regarding how you can exit in the business ought to be devised.
- IP Legal rights: Ip Legal rights ought to be accorded to the organization as well as in situation of partnership, to any or all the partners.
- Indemnity: Founders to indemnify the investors for that loss brought on by misrepresentation or warranties provided to them.
- Governing Law and Dispute Resolution: The FA must state the laws and regulations to become adopted and the entire process of dispute resolution.
Statutory Law References
Sec. 2(h) from the Indian Contract Act, 1872.
Important Do(s) and Dont(s)
- It ought to be an itemized agreement to get rid of ambiguities,
- It ought to be joined into during the time of incorporation of the organization,
- Make sure the legality from the contract and it is proper execution,
- Don’t offer severability of clauses because it is not recognized under Indian laws and regulations,
- Articles of Association should retain the provisions of FA.
- Most importantly, lawyer consultation is essential to draft the agreement in order to evaluate the legalities.