As you begin your startup journey, there are a lot of things that you need to have in place beforehand. One of these is the placement of a startup founders agreement. This is a contract between the founders that governs their business relationships. Having one in place right at the beginning helps to avoid disagreements or fallouts between the founders in the future. The founders having a good and healthy relationship amongst them is really important. The success of the business largely depends on this. In this article, we will be discussing a few important specifics of the founders’ agreement.
Having an equity agreement in place early on is really important. This is because, once the startup starts to hit off, it will be harder to structure an equity split that every founder agrees upon. Also, you need to have a clear direction regarding how much equity you are willing to distribute to the investors and the size of the stock option pool for the employees. Typically, in a 2 or 3 member founder team, equity is split equally. However, you need to factor in the contribution of each partner. This includes the personal capital and time invested, the stage of the startup the founder joined in, and the expertise. Therefore, discussing the equity split right at the beginning would help structure a fair deal accepted by all.
Read more: Startup Equity Explained
Vesting is another important factor of the founders agreement. Imagine you have a co-founder that has a 50% stake in the startup, who gets up one day and suddenly decides to leave the company. Now you are a founder short, whose expertise you don’t have. However, that really isn’t the most problematic part. Your co-founder will leave with 50% of the business if you don’t have a vesting agreement placed earlier on, and there will be nothing you can do about it. Now that, would be an actual nightmare. What vesting does, is it defines a certain time period over which the stocks are issued to anyone with a stake in the business. This acts as a security and protects the valuation and ownership of the business.
The standard vesting agreement is a 12 months cliff, and 4 year vesting. Let’s understand this with the help of an example. Let’s suppose you are the CTO of a startup and have a 50% stake. Now the cliff means that if you were to leave the startup before 12 months, you will leave with no stock in your name. The stocks start issuing after the cliff period is over. A year’s worth of share on the 12th month, and then a fixed number every month. If your 50% stake translates into 48,000 company shares, you will be issued 12000 at the end of the cliff, and then 1000 shares every month until the vesting period is over.
You should always have founder salary agreements in place. These are very useful as they allow the founders to work on the startup fully, and not do a side job to cover personal expenses. However, the salary agreement should be realistic and not that the early stage of the company can not afford it. How this works is that the company will “pay” the agreed amount to every founder each month. When there isn’t enough money in a particular month, the amount available gets divided equally or with the ratio agreed upon. The remaining balance is then covered by the company later on.
In conclusion, it is important to have equity, vesting, and salary agreements in place in the very beginning. This helps maintain a healthy work environment and good founder relationships. Creating a startup founders agreement on paper is really simple. You can check out the steps here.
Read more: How to Start a Startup
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