An English Solicitor & Israeli Lawyer Serving Corporate & Commercial Clients in Both Jurisdictions

Founders Agreements

Founders Agreements

When people set up a new business together, it will normally be a good idea to first take the time and relatively small expense to set down in a written agreement the principal terms of how their business relationship will work. This agreement is normally called a Founders Agreement.  It is a good idea even for close friends, and in some cases family members, and not just strangers to enter into Founders Agreements. Entering into Founders Agreements helps to focus the minds of the parties to consider where they stand on certain issues related to the management, financing and rights in the business. These issues might not necessarily be otherwise considered from the outset, but if they are not agreed upon from the outset, when they arise they could cause serious problems to the business and breakdowns in relationships, including relationships that once seemed unbreakable. Unfortunately, I have seen a number of instances over the years in which two or more previously close friends and business partners ended up as bitter enemies due to arguing over some crucial issue or other that could have been resolved from the very beginning of the business venture. They felt that, as close friends, they would be able to resolve any problem that came their way and so skipped over entering into a suitable Founders Agreement. What they failed to take into account is that it is much easier to discuss and agree upon certain issues in advance, than when emotions are influenced by frayed nerves and unforeseen pressures bearing down on the parties for resolution when the issue actually arise.

Points that a good Founders Agreement will cover will include:

  • Properly defining the scope of the intended business
  • Setting out what each of the founder’s roles will be
  • Will the business be managed through a corporate entity, a partnership or another form of legal entity?
  • How will the business be financed, particularly in the early days before the business starts to generate its own income?
  • Will each founder be expected to contribute financially to the business initially and will they be required to do so in equal amounts?
  • What happens if the business requires an injection of funds, but not all founders are able to contribute additional amounts to the company?
  • What kinds of decisions will be put to the vote of the founders?
  • Will any decisions require the agreement of all founders?
  • What happens if a founder wishes to sell any of their shares in the business?
  • What happens if a founder wishes to leave the business entirely?
  • Will founders be required to dedicate all of their working time to the business or will they be able to work on other projects as well?
  • Will founders be restricted from carrying on any activities that compete with the business and if so, then what will be the scope of the prohibited activities, for how long and covering what geographical area?

Each Founders Agreement will approach some or all of the above issues differently, depending among other things on the nature of the existing relationship of the founders and the nature and complexity of the intended business. However, it is clear that covering most of the issues listed above at the outset in a simple 3-5 page agreement could save a lot of time and heartache in the future.

Case Studies

  • I have advised founders on many different occasions on setting up appropriate Founders Agreements. In the vast majority of instances, this was as a first step in setting up a company with shareholders liability limited by shares, both under the jurisdiction of England & Wales and in Israel. In one particular transaction, the founders were good friends intending on developing a new technology. One of the founders had the technical know-how and would be principally contributing intellectual property to the transaction. The other had valuable business management experience and would be responsible for the overall management of the business. The two friends wanted to make sure that the ground rules for the business were set out in advance in order to avoid any unfortunate breakdowns later. The two founders are still enjoying working with each other while the business continues to grow and flourish.
  • In another transaction, I advised a business that had already been established and was in its early days. The business was looking for a suitable Chief Technology Officer. When they located the right man for the job, because they did not have sufficient finance to pay him a wage, they wanted to offer for him to join as a founder and to enjoy the status of being a founder in the company. Questions involved whether the joining founder would receive shares in the company outright or options that would vest over a period of time. As the granting of shares was preferred in this case, the parties looked at making the shares subject to reverse vesting, meaning that the new founder would lose shares if he left the company within a period of 4 years from when he joined.

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