In the early stages of business, the founders are usually focused on its growth. Legal documentation can, understandably, lose priority, particularly where there is a pre-existing relationship between the founders.
However, disputes in a growing business may arise between the founders, as amongst themselves, and as between their relationship with the company. Where expectations around roles, contributions or ownership have not been clearly agreed, differences can quickly lead to conflict. Founder agreements aim to prevent this by setting out how the founders will work together and how the business will be appropriately managed.
While the details will vary from one business to another, the central purpose remains the same: to avoid uncertainty. In the absence of a written agreement, disputes must be resolved with more ambiguity.
Clarifying roles and authority
In the early stages of a business’s lifecycle, founders often take on multiple responsibilities and decision-making can be relatively informal. As the business grows, however, the lack of clearly defined roles might become problematic.
A founder agreement can address this by identifying the areas for which each founder is responsible and establishing how decisions will be made. For example, the agreement may define roles in a particular area such as business development, operations or finance.
Equally important is the way in which major strategic decisions are handled. Matters such as raising investment, issuing new shares or selling the business may require the approval of all founders. Setting these thresholds in advance helps avoid disputes and ensures that decisions of fundamental importance to the company cannot be taken unilaterally.
Managing founder departures
As the business grows, its composition may change. There may be instances where founders decide to pursue other opportunities, their personal circumstances may change, or the company might determine that the founder’s role is no longer appropriate.
Notwithstanding their departure, a founder may continue to hold a significant shareholding or retain influence over the business. A founder agreement may therefore set out clear rules governing how shares held by a departing founder will be treated and whether the company or the remaining founders have the right to purchase them.
These provisions often distinguish between different types of departure. Someone who leaves on good terms after making a meaningful contribution to the company may be treated differently from someone who departs in circumstances that could harm the business. A “good” leaver might receive fair market value for their shares and, conversely, a “bad” leaver may only get nominal value. Addressing these scenarios in advance by means of the founder agreement can help avoid prolonged disputes if they arise.
Protecting the assets of the business
Early-stage businesses derive much of their value from intangible assets such as intellectual property, confidential information and key commercial relationships. Founder agreements commonly include provisions that protect these assets by restricting founders from competing with the business, soliciting employees or clients, or disclosing sensitive information to third parties.
Clauses may be included within a founder’s agreement that safeguard the company’s interest, as well as the other founders who remain committed to its development.
Preparing the business for investment
As businesses grow, they often may seek external funding. Within the negotiation of that fund raising, investors will typically expect to see that the founding team has a clear agreement in place that sets out many of the issues highlighted in this article.
A well-considered founder agreement that is uncovered during an investor’s due diligence will demonstrate that the business has taken a structured approach to these issues. By clearly documenting ownership, decision-making processes and founder obligations, the agreement can help provide reassurance to prospective investors that the company has been built on a stable foundation.
Practical considerations and the role of Culbert Ellis
At Culbert Ellis, we often work with founders, investors and growth-stage businesses to put in place structures that support long-term development. Our approach is to ensure that founder agreements reflect the commercial understanding between the individuals involved and provide the business with a robust platform from which to grow.
How To Get In Contact
To find out more or if you require assistance with these matters, speak with our Corporate Team on +44 (0)204 600 9907 or email info@culbertellis.com.
Accurate at the time of writing. This information is provided for general information purposes only and should not be relied upon as legal advice.
