What should a founder’s agreement include dependent on the stage of the company?

Take-aways from a talk in the Trust Center on 7/14/16

Different stages of your company require different founders agreements

  • Some examples include:
    • Pre-incorporation FA
    • Post- incorporation (“Day 1”) FA
    • Equity allocation
    • Investors/ shareholder agreement

Pre-incorporation FA

  • Every individual owns his own work and the IP for it until they assign it to the company or the company is incorporated
  • When VCs think about investing in your company they do their due diligence to avoid any legal risks, IP risks and others. They will want to make sure you have IP assignments from everyone who ever worked with you before they make the financial commitment.
  • This FA should include:
    • A section specifying that there is a company that will be formed and all IP will be owned by the company to be. (signed by all team members – paid and unpaid)
    • Expectations for equity split from the future entity (even if there isn’t real equity yet.
    • For more information about IP laws categories– see IP session take-aways from XX/XX

Post-incorporation (“Day 1”) FA

  • This FA should include:
    • IP assignment
    • Who are the shareholders
    • Who is on the board
    • Voting with your shares (to maintain this board designation)
    • Amendment provision:
      • People are signing this agreement in day 1 but it is actually effective for many years later (And binding even if you leave the company!)
      • Allowing for amendments gives your company the flexibility in case people with voting rights leave so majority of the shareholders is enough to make decisions.
    • Titles- who are the directors. This is very important as directors are allowed to decide on shares, fire people and make other critical decisions. They later assign the officers, treasurer and president.
    • What is the decision making process?
    • Who is going be on the board?
    • Shares split
    • Equity issuance
      • Best practice: start with an equal split as a baseline and then think: is there a reason to divert from this? Adjust based on these factors (for example: the idea generator/ the amount of past work/ future commitment /engagement…)
      • There’s no right answer! Sit down in a room without your lawyers, advisors. Come up with an agreement among the team members and leave it as is. Team discussion is 95% of the process. You will not figure out all the remaining 5% and will take all of your energy and time – not worth it!
      • To prepare for this discussion with your team, you need to be able to answer:
        • IP, what was your intellectual contribution
        • The time you spent in this project
        • The time you plan to spend in the future
    • What happens if someone leaves?
      • Best practice – make sure all shares are under vesting: members earn their equity over time. They get everything immediately so if the company is sold they can keep it but if they leave before the end of the vesting period they needs to give it back.
      • Typical vesting period – 3-5 years
      • Authorized share vs issued shares: If someone leaves, the shares he gives back return to company and resume the status of authorized but not issued. Issued shares are owned by the company. Unissued shares are not owned by the company. If more shares are issued to more people than the overall pool l of issued shares are shared by more people- individual shares are diluted.

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