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While legal documents may not be your top priority when starting a business, David Sheridan stresses a Founders Agreement can save you a lot of hassle.
Following his introductory blog at the end of last year, David Sheridan, co-founder and commercial director of Onedox.com, a virtual dashboard for all your household bills, shares his latest diary instalment. This month he reveals the importance of creating a Founders Agreement…
Our founding team all agreed we had the components of a good business idea. Our market research supported our starting hypothesis, we had identified potential customers for our product and most importantly, we had satisfied ourselves that our business could ultimately be profitable.
Maybe it’s my previous legal career looking for some exercise, but in my view, this felt like the perfect time to de-prioritise everything else, have a temporary moratorium on fun and put in place… a Founders Agreement.
If our experience is indicative, creating a Founders Agreement will be awkward, time-consuming and lead to some heated, semantic debates amongst the co-founders. The good news is that once you’ve spent a full week exclusively working on this (yes, a week) you can progress with the strong foundations necessary to build your business upon. On the other hand, moving forward without one is likely to cause major problems in future.
Why we created a Founders Agreement
The better you know your co-founders, the easier it can be to overlook the need to have documented clarity about what you can expect from one another and from the business, rather than assuming you all share the same view of how the business will operate.
We felt that having a Founders Agreement in place on day one would provide us with confidence that we have an effective and equitable framework for company decision making, clarity of individual roles and responsibilities and a shared view of what benefits we can expect in future, in return for our efforts.
The key components of our Founders Agreement
The detail of each Founders Agreement will inevitably vary – given it reflects the considerations unique to each start-up. However, based on our research and the matters that came to light during our discussions, it has become clear that there are certain fundamentals that must be evaluated, agreed upon and reflected in every agreement. I’ve highlighted a few of these below, some of which may serve as helpful context to those who are considering putting one in place:
What time commitments were each of us prepared to make and secondly, how did we put a value on that time relative to one another? This section also documented how much time each of us had spent working on the business to date.
In our case, underpinning equity allocation was the assumption that all co-founders would be working on the business full-time.
Roles and responsibilities
We were mindful not to approach this from the perspective of using our skills to artificially shape what the business would do. So, we started by identifying the requirements of the business for the first year (including business administration, finance, front and back-end development) and then looked to match our skills to those requirements, or else identify what gaps would require external resources.
We then allocated an owner and supporting contributor for each business requirement, documenting this information within the Agreement and finally, settling on reflective job titles. The key benefit from this approach has been to ensure that, whilst collaboration is important, we also have clear areas of authority to ensure we can individually execute things quickly and without making every decision by committee.
Equity and vesting
We wanted to ensure that the allocation of equity in the business reflected the work we had already undertaken and more significantly, that we will undertake in future. In other words, we want to reward hard work and not just being a founder.
In order to do so, we agreed upon an allocation of shares, subject to a vesting schedule, and with a diminishing right of the business to buy shares back from each founder. In essence, this means that each co-founder accrues equity at certain milestones. In our case these milestones are primarily points in time, rather than being based on “deliverables”, which may be more appropriate in teams who have less previous experience of one another.
The benefits we’ve seen
Like all the best contracts, our Founders Agreement has been in a drawer since we executed it and it isn’t something we refer to on a regular basis. I feel it does, however, perform a very important function. Aside from the specific and practical details enshrining roles, voting rights, equity and so forth, it has had a more underlying, cohesive effect on our start-up.
It has meant that from the beginning, there has been total transparency as to what we expect from the business and one another, and what we will provide in return. Having clarified what the fundamentals of our business are through the Founders Agreement, we have been much better positioned and able to focus on working together to achieve them.
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