“I didn’t think I needed a partnership agreement; I went into business with my best friend.”
This approach may single handedly keep small business lawyers employed.
Even if you’ve been best friends since birth and you know each other inside out, creating a startup without a partnership agreement with anyone is extremely risky.
And it’s a risk you don’t need to take.
With a simple yet effective partnership agreement in place, you can seamlessly transition from besties to bosses, never having to worry about your friendship getting tarnished.
Here, we will show you why a co-founders agreement is so important and how to craft the perfect one.
What If We’ve Already Got It All Figured Out?
It’s incredibly rare for anyone to enter into a partnership with someone they don’t already know. As a result, it can be tempting to quickly brainstorm titles and crack on with other pressing matters.
After all, if you’re already close, there’s no need to get bogged down in the paperwork is there?
While you might find it quick and easy to give yourselves dream work titles, you still must get it written down in a founders’ agreement.
It’s a contract you may never need to revert back to, but it’s there if things ever go awry. If your partner suddenly resigns, where do their shares go? It’s pretty tricky to go around the office calling yourself the “Official Overlord of Everything” when you no longer own your own company.
Pro Tip: The title Official Overlord of Everything might sound fun, but it doesn’t always look great when you’re trying to recruit.
What Is a Founders’ Agreement?
Simply put, a founders’ agreement is a legal document outlining the rights, responsibilities, and ownership distribution among the founders of a company.
Sounds boring? Well, unless you’re into your contracts, it kind of is.
But that doesn’t mean it isn’t necessary.
The Basics of Your Founders’ Agreement
When it comes to a founders’ agreement, no one size fits all. However, there are a few key aspects you should include:
Names of founders and company: Include the full legal names of the founders and the registered name of your business.
Who owns what?: Establish what percentage each co-founder starts with. This can be rewritten in the future.
Define the startup: A sentence or two outlining your startup’s business plan.
What’s in the piggy bank?: Each founder likely contributed something to join the project. Get that noted down.
Expenses and budget: Lay out how you plan to handle expenses and budgetary costs going forward (Otherwise, you give your partner a free license to get as many oat milk flat whites as they want).
Who’s in charge of what?: It’s easy to verbally agree on what your roles are, but it’s much safer to get it all written into a signed agreement. Again, this can be rewritten as your business grows.
Decision-making and approval rights: Who is allowed to vote on company decisions, and if so, what aspects?
Salary and compensation: Some may choose to take no salary at the start, while others may opt for a small salary for the important stuff like bills, food, and rent (and oat flat whites, of course).
What if someone leaves?: Like a relationship, it’s always strange to think about it ending at the very start, but plans must be in place if the candle of your business romance begins to dwindle.
Creating a Founders’ Agreement
1. Pick a template
Don’t do the heavy lifting when someone has already done it for you!
Here are several templates you can use to get you started:
- Free Founders Agreement Template
- RocketLawyer Founders Agreement
- Docracy Founders’ Agreement Template
2. Do the easy bits first
Know your own name? Excellent, get it written down.
Start with the easy stuff to get the ball rolling.
3. Take your time with the tricky bits
Getting the complex bits right isn’t always easy. Carve out plenty of time to ensure everyone is happy with these aspects of the agreement.
4. Keep lawyers in business
If we all start signing founders’ agreements, there won’t be any work for business lawyers, right? Well, not quite. Getting lawyers to check over your agreement is a great way to ensure it meets requirements and is a legally binding contract.
5. Review and sign
Get it signed, get it dated, and get it stored. Provide each founder with an electronic copy for future reference, and file it away in the hopes you’ll never need to look at it again.
Frequently Asked Questions About Co-Founder’s Agreements
What should be included in a co-founder agreement?
Names, ownership structure, startup objective, initial capital, expenses and budget, roles and responsibilities, legal decision-making and approval rights, equity, salaries, and termination clauses.
What is the agreement between the founder and co-founder?
The agreement between the founder and co-founder typically outlines their roles, responsibilities, ownership stakes, decision-making authority, and other important aspects of their partnership in a business.
What is the difference between a founders’ agreement and a partnership agreement?
A founder's agreement specifically addresses the roles, responsibilities, and ownership distribution among the founders of a business, while a partnership agreement covers the terms and conditions of a partnership between two or more individuals or entities engaged in a business venture.
Keep Learning: The Ultimate Guide To Creating The Perfect Founding Team
Don’t Miss Any More Vital Business Startup Steps
When setting up a startup, there are so many things to do, and important jobs can easily fall by the wayside. Check out foundr’s free training to ensure you don’t miss any crucial aspects and give your business the best chance of success.