Should I Use a Founders’ Agreement?
The short answer is, in our view, probably not. Although it depends… (the classic lawyer answer).
Often, founders are encouraged to enter into a Founders Agreement with their co-founder because it memorializes the rights, responsibilities, and expectations of each founder, especially in the early days of your startup when much is ambiguous and unknown. The hope is that this memorialization helps mitigate and prevent disputes, incites conversation, and establishes a decision-making framework for you and your co-founder to navigate the uncertainty.
This thinking has merit to it. For example, a Founders Agreement could set expectations for important concepts such as how to handle co-founder disputes (e.g. mediation), managing an exit strategy, or outlining how a co-founder may depart.
However, we generally don’t encourage Founders Agreement for several reasons.
First, many core concepts in a Founders Agreement such as roles and responsibilities, equity distributions, vesting schedules, capital contributions, IP ownership, etc. will be governed and defined by various standalone agreements during incorporation. An incorporation will include essential documents such as the Certificate of Incorporation, Bylaws, Stock Purchase Agreements, Confidential Information and Invention Assignment Agreements, etc. which are purpose-built and tailored to address governance and founder-related concerns. As a result, we think it is better that founders proceed with incorporation – which should encourage them to discuss and sort out any issues, and use a comprehensive set of detailed agreements – rather than use a single Founders Agreement.
Second, Founders Agreements are often written in such vague and undefined terms that they are largely unenforceable. Alternatively, Founders Agreements may require founders to agree to things they can’t legally deliver on. So ambiguities and/or impossibilities may cause more legal headache than they prevent! For example, founders may agree that their exit strategy is to IPO, but when the founders are actually sitting on the Board of Directors and owe fiduciary duties to their company and stockholders, they cannot be expected to be bound by such restrictions if an acquisition offer in lieu of an IPO arrives.
Lastly, from a practical perspective, we feel that Founders Agreements incur time, effort and expense that could be better spent elsewhere. Getting the foundation of your company setup correctly is critical, but we believe that this foundation is better addressed via robust incorporation governance documents and agreements. A Founders Agreement by contrast deals more in ambiguities and uncertainty for situations that may never arise, taking time away from focusing on actionable matters such as customers, product-market fit and commercial strategy.
