This Founders Agreement is a non-legally binding document designed for use by founders of a startup or other new project.
Naturally, when people get together and decide to create a new project, there is a lot of excitement and drive to get started. Sorting out the legalities is dry and boring and many people put it off. However, this is the time that a lot of basic issues need to be considered. Failing to address them now can lead to misunderstandings down the track (even between close friends or family members), which in turn can lead to costly disputes.
This Founders Agreement is therefore designed to be a simple and easy-to-use document that shows the founders what sorts of issues they need to consider and discuss. It is non-legally binding, so that if things change along they way (which they often do) the founders have the flexibility to adapt with it.
However, it operates as a guide - showing the founders the sorts of things they need to consider and the conversations they need to have. It also may provide protection to the founders because in the event of a dispute, a founder will be able to refer to the agreement to explain why they did what they did, or why another founder should not have done something that they did.
In addition, most disputes between founders arise out of misunderstandings rather than malice. For example, A might have thought that B was responsible for a certain part of the project, but B thought A was doing it. Or B might have thought she was being paid an hourly rate to perform the work, while A thought B was doing it for free. Therefore, simply having a discussion upfront, and brainstorming potential issues and how they will be addressed, can prevent a lot of disputes from happening in the first place.
This is a beginning document for the project, but in most cases, founders will go on to create more formal structures and documentation. For example, the founders may go on to set up a company or a partnership, and may create binding documents in connection with this (such as company formation documents or a Partnership Agreement).
In addition, if the founders are concerned about such issues as confidentiality or preventing founders from creating businesses in competition with the project, then they may need to consider organising separate binding documents to deal with these issues. For example, we have a Confidentiality Agreement and a Non-Compete Agreement available.
How to use this document
This document should be used to guide a conversation between the founders, in order to ensure that all founders are on the same page. Therefore, the first step for the founders should be to have a thorough discussion about how the project is going to work. The founders may consider addressing the following topics:
- What are each founder's responsibilities in relation to the project?
- How much time should each founder respectively be contributing to the project (for example, how many hours per week)?
- What specific jobs will each founder be responsible for?
- Will the founders be paid for their time, or will they do it for free?
- What share of the equity in the project will each founder receive?
- What happens if a founder wants to retire from the project early?
- How will decisions be made? Do all founders have to be in agreement or will there be a majority vote?
- How can the partnership be dissolved?
Once this document has been prepared, all founders should be given a copy and should be allowed some time to review it. Once all of the founders are happy with the document and any concerns have been addressed, then all of the founders should sign the document. They can then have their respective signatures witnessed by an independent adult witness (they cannot witness each other).
This Founders Agreement is intended to be non-binding, therefore it does not apply any laws in particular. However, ordinary principles of contract law, as provided by the common law, may be applied in interpreting and understanding the agreement between the founders.
In the event that a founder acts in bad faith, causing another founder to suffer loss, then equity, estoppel, or laws dealing with misleading and deceptive conduct may become relevant.
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