One of the most significant and important legal steps at the beginning of any new business, and especially a startup, is the preparation and signing of a comprehensive, clear, and business-tailored founders" agreement. Despite this, founders" agreements are often postponed to a later stage, out of a sense of closeness and trust between the founding partners, or a desire to avoid "complications" at the initial idea stage of the business.
In practice, especially in the initial stage, a shareholders' agreement is critical and can prevent disputes, conflicting expectations, and significant delays in the future.
A founders' agreement is the foundation upon which all collaboration between founders sits. The agreement clarifies, among other things, each founder's roles, rights and obligations, responsibilities, commitments, and investment percentage.
In the absence of a formal agreement, fundamental questions tend to arise for the first time precisely in moments of crisis – when an investor enters, when a founder feels wronged, or when the company starts generating significant revenue. Instead of focusing energy on growth and opportunities, the business can get sidetracked into personal, legal, or business conflicts – and sometimes even disintegrate completely.
A good founders' agreement regulates, among other things:
- the identity of the founders and their contribution – Who is considered the founder,.
- the offtake and mechanisms Vesting – What percentage does each founder hold, do the holdings “vest” over time based on continued actual activity, and what happens to the share of a founder who leaves early?.
- the roles, responsibilities, and structure of the corporate 'government' – What is the role of each founder (management, development, technology, marketing), which decisions are made by a simple majority, which by a special majority, and which require the agreement of all founders.
- Intellectual Property Issues Ensuring that all rights to the code, designs, brand, ideas, and products belong to the company and not to the founder, which prevents a departing founder from claiming ownership of these rights.
- Competition restrictions and confidentiality issues The founders' commitment not to establish competing activities, not to use the company's business/technological information for their personal benefit, and not to transfer information to third parties.
- Founders' entry and exit methodsWhat happens when a founder leaves, reduces their activity, or fails to meet their commitments? Under what conditions may the company or the remaining founders purchase their shares, and at what valuation mechanism?.
- Conflict Prevention and Resolution Mechanisms– Establishing a dispute resolution mechanism (mediation, arbitration, “break-the-deadlock” mechanisms in situations of deadlock) to minimize damage to business operations.
In many cases, the most difficult conflicts between co-founders don't stem from malice or bad faith, but from differing expectations that weren't clarified in time: one founder sees the business as an “advanced hobby,” while the other treats it as a full-time job; one expects absolute equality, while the other assumes that the person who came up with the idea will receive a larger share. A founders' agreement reduces this gray area and establishes written, clear understandings.
From a business perspective, signing a founders' agreement early on signals to investors, partners, and banks that the company is managed responsibly and in an organized manner. In due diligence documents, one of the first questions is whether a proper and up-to-date founders' agreement exists. The absence of such an agreement, or the existence of a partial and unprofessional one, could delay investments and even derail deals.
It is important to emphasizeAn effective founders' agreement must be tailored to the founders' relationship structure, the business model, fundraising plans, and the company's future development. A correct document at this stage can prevent future disputes, save high legal costs, and most importantly – allow the founders to focus on developing the business instead of putting out fires.
Our firm assists founders and new companies from the idea and incorporation stages, and among other things, drafts precise founder agreements tailored to their needs. We would be happy to help you build the right legal infrastructure from the company's first steps, so you can focus on what truly matters – building your business.