When you start working on a new project, since the idea is yours, you will not always want to establish a company right away and you may not know what legal form it should take. You stick to your current businesses or other work-related activities. However, in order to settle the matters between you — the founders — it is worth drawing up an appropriate founders’ agreement or other agreement of founders or partners.
Why is it worth it? Despite the fact you do not think about formalising your mutual activities, you should know such an agreement is concluded for the time of war — not peace. Without it and without discussions reading its scope, it may turn out that later on you do not see eye to eye when it comes to various significant matters.
Legal form of a start-up
In the beginning, when you start a new business project, a start-up, you have to choose what form of business you want to run. You do not have to decide about that straight away. Most often, one of you already runs a business entity and this should be enough to carry out certain activities.
Of course, the next stage of your cooperation is a more advanced form of activity, which is a commercial law company, e.g. limited liability company.
Although you are probably friends, in the meantime, before you establish a company, it is worth settling the basic issues of your cooperation. You will need an agreement between the founders, which we are going to call the founders’ agreement.
Agreement between the founders
The founders’ agreement is nothing but an agreement that aims at settling the legal and practical issues between the people (founders) who work on one project (a start-up). I suggest you write such an agreement in the initial phase of your cooperation. It’s not mandatory, but you will certainly be forced to do so while looking for an investor.
I’d like to emphasise that the drafting of the founders’ agreement may affect your friendship but it will surely protect you against any possible misunderstandings in your business relations.
Personally, I like simple agreements on a daily basis, but there are a few in the case of which I follow the principle stating ‘the more, the better’. The founders’ agreement is just such an agreement. If you conclude it before the company is established, it should at least clarify a few important issues I am going to describe below.
A) Determination of the contributions paid by the founders
One of you made the software, the second one — the layout, and the third one was responsible for the graphics and website. Each of you, the founders, contributes something valuable to the start-up and that should be described.
Additionally, real estate, a car or money can also constitute a contribution. It is worth defining as precisely as possible the information about the made contributions in order to avoid misunderstandings.
B) Determination of the founder’s shares
The shareholding in the start-up depends on the workload and the amount of contribution put into the entity by each of you. You can do this as a percentage.
In the initial phase, when you prepare your own FA, the volume of shares will be fixed. Later on, this may chance, when investors start to enter the game — then you will operate as a specific company and, you could say, on different terms.
Keep in mind there is no rule that you have to have equal shares in your project. It is worth having this conversation before there is a conflict.
C) Distribution of responsibilities among the founders
An important and undisputed issue is the distribution of responsibilities and liabilities in your business. As partners, each of you specializes in a different field and has different skills.
Each of you will also be responsible for different elements of creating your joint project/product. This should be precisely described in the agreement.
In the event of improper performance of duties, each party will be able to enforce the obligations set out in the agreement efficiently.
D) Determination of the decision-making process in the start-up
One of the major problems is the decision-making process, which has not been described in detail. What will you do if you come up with another brilliant idea and you will want to implement it, but your co-founder will want to wait?
If there are two or more founders in the start-up, there may be a problem with making a decision during the first disagreement. First of all, it is necessary to establish the rules of making key decisions for the general matters and for particular duties/tasks, e.g. marketing.
Another issue to be established is how decisions are to be made. After all, you will not send each other any messages in ‘written form under pain of nullity’ in relation to every matter.
Should all parties to the agreement agree? Should meetings be held in advance? Or should it be enough to make a decision by e-mail?
E) Determination of intellectual property in the start-up
We are finally reaching the essence of the article. But maybe I’m exaggerating — other things are equally important. But this one is different. You remember that intellectual property rights usually belong to the creator. In the case of a company, these rights are held by the company. Unfortunately, you are at a stage when you do not have this company yet.
During the development of each product, it is highly probable that it will consist, in whole or in part, of works, in accordance with the Act on Copyright and Related Rights.
It is worth paying attention to that fact and describe it in advance in the agreement.
In your founders’ agreement, determine who will have the right to particular parts, meaning: the know-how, graphics, software, website design and, of course, the logo and the name of the start-up.
Using the knowledge contained in the act mentioned above is a good idea.
F) Other provisions in the founders’ agreement
The following information might be found in the agreement: the aim of entering into the agreement, ways of terminating the agreement or excluding some founders in certain situations.
Keep in mind that the subject of the agreement will not be only a creating of a product, but also the performance of later marketing activities that aim at selling this product.
I hope after you have read this article, you already know why you should conclude such an agreement and what to include in it.
If you already know what should be included in a founders’ agreement, share this article. By doing that, you will make me glad, and your friends will surely thank you for an interesting piece of writing.