When a startup company comes into existence, it requires a set of rules between the founders/promoters of that company. “Founder Agreement” is a contract which is drawn between the founders/promoters of a company on key issues in regards to their company.
Why do we need it?
- To outline mutual understanding, responsibilities, rights and obligations of each party to the FA and align their goals.
- To keep a record which will prevent ambiguities in future.
- To provide for allocation and distribution of resources.
When to enter such agreement?
- At the time of tabling the idea;
- At the time of incorporation;
- At the time of capitalization.
Standard Terms & Conditions of a FA
- Equity Investment and Shareholding Structure: Who should hold how much shares? Equity should be divided on the basis of contribution of each of the founders respectively.
- Board Management and Governance: How many founders to be on the Board and why? How the company is to be governed?
- Salary: Compute the salaries of the Founders and their increments.
- Roles & Responsibilities: Divide roles and responsibilities at the top management.
- Shareholders’ Meeting: Frequency of meetings, authorized people in the meetings.
- Fresh Issue and Transfer of Shares: Issues such as Lock-in periods, founder selling his stakes, Right of First Refusal, transfer upon death, etc.
- Approval of Debts: What will be the procedure to approve action which might incur debts to the company?
- Appointment and Removal of a CEO: It should be agreed as to how founder(s) will appoint and remove the CEO.
- Vesting: Right of the company to buy back its shares upon some contingencies is mentioned.
- Confidentiality, Non-Compete and Non-solicit: A founder not to engage in any activity (espionage, breach of confidentiality) with any other entity which would jeopardize or be adverse to the company’s interests or would directly compete with the company.
- Representation and Warranties: Founders are restricted from entering into any other contracts which would limit their obligation towards the company and also, prevent any third party rights over the Intellectual Property of the founder(s)/company.
- Amicable Exit from business: A strategy as to how to exit from the business should be devised.
- IP Rights: Intellectual Property Rights should be accorded to the company and in case of partnership, to all the partners.
- Indemnity: Founders to indemnify the investors for the loss caused by misrepresentation or warranties given to them.
- Governing Law and Dispute Resolution: The FA should mention the laws to be followed and the process of dispute resolution.
Statutory Law References
Sec. 2(h) of the Indian Contract Act, 1872.
Important Do(s) and Dont(s)
- It should be a written agreement to remove ambiguities,
- It should be entered into at the time of incorporation of the company,
- Ensure the legality of the contract and its proper execution,
- Do not provide for severability of clauses as it is not recognized under Indian laws,
- Articles of Association should contain the provisions of FA.
- Above all, lawyer consultation is necessary to draft the agreement so as to review the legalities.