What is a Founder’s Agreement

And Why It’s Essential Before You Start Working On Your Startup

Why is a Founder’s Agreement important?

Because, when you incorporate your company, the law assumes that all of the founders own equal shares of the company.

Here are some examples of why a Founder’s Agreement is important:

When 2 co-founders start a company together and one decides to leave after 1 year, should he/she get 1/2 or 1/3 of his/her original ownership back?

How much time should you spend on creating a Founder’s Agreement?

The answer depends on how much risk you want to take on.

How to create a Founder’s Agreement:

1. Decide how you want to split the ownership of the company.

What percentage of the company do you want each founder to own? Do you want any founder to own more than 50%?

2. Decide how you want to make decisions about the company.

Who needs to agree on decisions, and what is the voting threshold for each type of decision?

3. Decide how you want to add or remove founders from the company.

Do you want to add or remove founders by unanimous agreement, or by majority agreement?

4. Decide how you want to divide up shares of the company between founders.

Do you want all of the shares of the company to be issued as “class A” shares that are equal for all of the founders, or do you want some of them to be issued as “class B” shares that have different rights and/or preferences than class A shares?

5. Decide how you want to handle a merger or acquisition of the company.

What happens if the company gets acquired? Do you want to get paid in cash, stock, or some combination of both?

6. Sign and date it.

If two founders have already started working together on a project and they decide to incorporate their company soon after that, then they can use this Founder’s Agreement as their very first agreement.

Founder of Cudy Technologies (www.cudy.co), a full-stack EdTech startup helping teachers and students teach and learn better. I am also a mentor and investor.

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