Properly Structure a Founder's Agreement

How to Properly Structure a Founder’s Agreement for Your New Venture.

We are a nation of entrepreneurs, but we are also living in a litigious society, so if you are starting a new venture and there are other founders involved, a founder’s agreement is essential to protecting your fledgling enterprise.

Here are some tips on how to properly structure a founder’s agreement:

Assign roles and responsibilities.  People tend to go into business with others who have strengths they themselves may be lacking, and this can be a good thing. But it is important to solidify those roles and responsibilities or you could find yourself with too many cooks in the kitchen.  Consensus can be important for major decisions, but can cripple a new venture if every little decision has to be agreed upon by all parties.  Having clearly delineated lines of responsibility will help you cut down on the growing pains of a new business and create the necessary accountability for a fully functional organization.

Allocate ownership.  Establishing how equity in the enterprise will be split among founders should be done early on so that misunderstandings don’t occur once the profits start to roll in.  The negotiation may be delicate, especially if not all founders are equal, but it’s a conversation you need to have sooner rather than later.  You should also determine market vesting terms for each founder’s equity in case one founder decides to leave early or there is a split.

Assignment of intellectual property.  Every business has intellectual property, and yours will be no different.  Whether it’s a proprietary technology or product, you must have the IP assigned to the company so that the business retains the right to that intellectual property ,and can use it to grow and prosper.  If one of the founders develops a technology or product that is not assigned to the company and then leaves with it, this could cripple the future of your business.