Finance

FOUNDERS AGREEMENT IN INDIA

WHAT IS A CO – FOUNDER AGREEMENT

It is a contract governing business relationships of company’s founders who enter into such a contract to regulate uncovered matters in company’s agreement. It sets out the responsibilities, rights, obligations and liabilities of every founder.  

WHY FOUNDER AGREEMENT IS NEEDED ?

It is essential to enter into such agreements to solve issues in case any difficulty arises.   In absence of an agreement to this effect, one partner may walk away and use knowledge of the business and know-how for competition.  One may also get into a situation where one partner takes a back step and just reap the benefits of hard labour of the other partner.  None of these positions are favourable for the business and are undesirable. Thus if one does not engage in future planning, he/she might end up jeopardizing the business even before it starts. FOUNDER AGREEMENT PROCESS

  1. The responsibilities and roles of each co-founder are to be established to have a well functioned management system.
  2. Allocation of ownership of new enterprise amongst founding team. Upfront splitting up of equity between the founders is imperative to ensure that there are no hurt feelings or misunderstandings after things come into play and this exercise is to be nailed down very carefully. Implementation of terms for market vesting for all founders’ equity so that future planning can be done.
  3. When co-founders start reiterating an idea and cone up with a business plan or start developing and building a platform or a product, intellectual property (IP) is created. It is necessary to ensure that whatever developments are done in IP do not belong to an individual but the entity.

ADVANTAGES AND BENEFITS OF FOUNDERS AGREEMENT

It is highly recommended that company’s founders enter into a formal agreement. Some of its advantages are as follows: It lays down a structure for decision-making and management at shareholder and director level and incudes details regarding how a deadlock has to be resolved. It sets out rights of shareholders to attain financial or other information It also decides on some of the following fundamental questions such as: Whether dividends are to be paid at the discretion of director or whether a dividend policy is applicable. Whether there is a need of shares of different classes. Whether and how transfer of existing shares, issuance of new shares can be done and whether pre-emptive rights are granted. It also includes other important details that is very crucial for the business such as intellectual property ownership clauses, service agreements, confidentiality obligations and restrictive covenants.

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