Do I need a founders’ agreement? Or a shareholders’ agreement? I don’t know.

Ask us.  We’ll be able to tell you what you need to know, and which whether an SME founders agreement is the document you should be reaching for.

Simply put, a founders agreement formalises what you are doing, who you are doing it with and where you are doing it. It is your first proper chance to document and protect what each of your co-founders is bringing to the business, how you will work together, how you will make decisions and what happens if one of you wants to leave, is not pulling their weight or if you have a dispute. 

Chances are, you are going into business with friends or your family, so you are risking not only your money but also your personal relationship with your co-founders.  So, think of this as a founder pre-nuptial agreement because let’s face it, no matter how good your relationship with your co-founders is, it is inevitable that you will have differences in opinion at some stage. A founders’ agreement provides you with a framework within which to navigate those difficult or challenging conversations in advance of any problems arising. You will need a healthy dose of pragmatism, as it will not always be sunshine and roses.

Do I need to have both an SME founders’ agreement and a shareholders’ agreement?

No. An SME founders’ agreement is a relatively informal document and it is usually, but not always, a preliminary step to a future shareholders’ agreement. Having a founders’ agreement shows your thought process as well as your commitment to your business idea.  It also demonstrates to future investors that you are organised, forward-thinking and already planning for your success. 

If, in the future, you decide to move forward and incorporate a limited company, or form a partnership, then you would typically seek to replace your founders’ agreement with either a shareholders’ agreement (for a limited company) or a partnership deed (for a partnership). This next step typically comes about when you are bringing in outside investors. We like to think of the founders’ agreement as more like your first draft shareholders’ agreement.

What should it look like?

Divide it up into manageable chunks:

First, consider the basic information that you will need. Such as your business name, and your job titles together with a brief description of your business plan, mission, vision, and goals. This is your roadmap.

Second, what are your roles and responsibilities? Jot down which aspects will fall into each founder’s area of expertise/responsibility?  Here you should divide and conquer.  You should each be playing to your strengths and skillsets, so work out what these are and allocate responsibilities between you.

Third, what will your decision-making processes look like? Will you approach minor decisions in the same way as major decisions? It is one thing deciding to buy a Nespresso machine, but quite another when hiring key personnel.  And what happens if your decisions are tied, how will you resolve deadlock situations? 

One of the critical factors to success is working out how you will resolve your future disagreements.  It goes without saying that you will have disagreements, and so you need to be able to come up with solutions that you can all live with.

Fourth, will you and your founders have equal ownership?  There is no rule saying that you do.  The old adage that ‘an equal share doesn’t add up to a fair share’ rings true here.  For example, who came up with the business idea? If the business concept was yours, then perhaps you should get more?  Who has put in the most amount of money? Who has the connections or the skills to get the business off the ground?  Your agreement should address what ownership percentage each founder should get, whether it is based on continued participation in the business or some other vesting arrangement. 

Fifth, how will you work on the venture together?  What time and resources are each of you prepared to allocate to the business?  Full-time commitment is expensive…and risky because you are risking an awful lot more if the idea fails.  Will you each be receiving a salary?  How can this change if the business grows and starts turning a profit?

Sixth, think about your business assets and intellectual property – what are they and who owns them Do you need logos, will you need to trademark any of your ideas?  What if one of your co-founders has already registered a trademark? Do you need to set up a company and have your co-founder assign their intellectual property to it?

Seventh, get your head around the jargon and don’t shy away from the hard stuff. Understand that you may need to get to grips with non-disclosure agreements or non-compete agreements. Even director service agreements. You don’t have to write these documents yourself but recognise that you will likely need more than just a founders’ agreement to protect your idea from the outset.

Eighth, know your end game. You need to have a game plan if you have an irreconcilable dispute, or one of your co-founders is not pulling their weight or if one of you wants to go travelling, leave the business or become ill. Conversely, what if you decide that you need to bring in other people for their expertise and/or their investment? How do you bring people in or buy out one of your co-founders? Do you want to have a say in who they sell their part of the business to? 

All of these considerations are virtually the same for a shareholders’ agreement, only it is more complex once you are bringing in investors. 

When should I sign a founders’ agreement?

There is no magic time to sign an SME founders’ agreement. A good time is when you go from a mere idea to actually putting in some hours, and the latest time is likely to be right before any one of you starts making significant investments in your venture. Why? Because it ensures that all co-founders are on the same page and can help identify any red flags as early as possible.

Do I need a lawyer?

Of course, you know that we are going to say yes.  But seriously, just yes. 

Online legal platforms can and do provide customisable templates for founders’ agreements. These templates can serve as a starting point but you really should talk to a lawyer to ensure they meet your specific needs.  There is no one-size-fits-all template for a founders’ agreement as they need to be tailored to your specific circumstances and your business idea.  We can help ensure that your agreement complies with applicable laws and addresses your specific ideas, needs and concerns. 

Thank you Belinda Sullivan for this article. Belinda is a lawyer and legal consultant for Farringford Legal.