When you join forces with your co-founders to start a new business, legal stuff is probably one of the last things you want to spend time on – especially the sometimes sensitive subject of commitment, cooperation and ownership. Nevertheless, agreeing on these topics from day one may be save you a lot of arguments and headache down the road. That’s why you should have a founder’s agreement.
A founders’ agreement is very similar to a normal shareholders’ agreement (SHA, Icelandic: hluthafasamningi). In fact, it is a SHA in the sense that it’s an agreement between the shareholders. A founders’ agreement is a special kind of SHA for companies without investors or any other major external shareholders. Some of the topics are dedication, vesting, share transfers and decision-making.
Standard Founders’ Agreement Terms
This is a very brief summary of some of the key terms in the complete founders’ agreement that you can download below.
|Participation Right:||The shareholders will have the right, but not the obligation, to participate in subsequent issuances of any equity securities on a pro rata basis.|
|Protective Provisions:||A qualified founder majority is required to (i) amend the articles of association; (ii) issue, redeem or purchase shares or other equity securities; (iii) adversely change rights of the shares; (iv) declare or pay any dividend or make a decision on other asset distributions; (v) guarantee any indebtedness, save for trade accounts of the company, or incur any indebtedness in excess of ISK [amount]; (vi) merge, demerge, liquidate or dissolve the company or a subsidiary; (vii) transfer, lease, license (other than licenses granted in the ordinary course of business on a non-exclusive basis), pledge or encumber assets or rights material to the company; (viii) materially amend the business plan; (ix) hire, fire or amend the terms of the employment contract of the CEO; and (x) enter into any agreement or assignment with a shareholder or its immediate family member or any entity controlled by a shareholder and/or its immediate family member(s).|
|Board of Directors:||Each founder shall elect one director.|
|Right of First Refusal:||Transfer of shares in the company is subject to other shareholders’ right of first refusal.|
|Drag-Along:||In the event a qualified shareholder majority accepts an offer to sell or otherwise transfer their shares to an independent bona fide third party, all other shareholders consent to sell or otherwise transfer their shares on the same terms and conditions as the majority shareholders who have accepted the offer.|
|Tag-Along:||The shareholders shall have the right to participate in any sale or other transfer of shares in the same proportion and on the same terms and conditions as offered to the selling shareholder.|
|Vesting:||Shares held by the founders will vest over six years as follows: 16.7% to vest one year after closing and the remaining 83.3% to vest in equal monthly installments under the following 60 months. During the vesting period, the founders may not transfer their shares without the approval of a qualified founder majority.
During the vesting period, any unvested shares of a founder who leaves the company may be purchased by the other shareholders pro rata at (i) quota value if the founder is a ”bad leaver”, or (ii) market value if the founder is a ”good leaver”.
|Non-Compete and Non-Solicitation:||Each founder is required to sign a non-competition and a non-solicitation commitment, valid until one year from the date he/she ceases to be an employee or a director of or a consultant to the company, whichever is the latest.|
|Intellectual Property:||The founders shall assign all relevant intellectual property to the company.|
For the complete version of the founders’ agreement, please download the document below.