For idea-stage companies where the founders aren't being paid a salary, having a Founder Agreement in place with each founder protects the founders and the company if things go wrong, which happens more often than you think!
Starting a business is exciting time, you have a great idea and a vision to change the world. You might even be in business with your friends or family but it’s still important to ensure that you plan for the worse while still hoping for the best.
Without the right documents in place, you can end up with a founder that you can’t remove - even when they are not acting in the company’s best interest.
The provisions outline you and your co-founder's duties as directors and founders of the company, outlining reasons for the potential termination of founders, what to do in the event of a director leaving the company as well as other clauses protecting the company’s property and interests.
In the early stages of the business the founders generally aren't paid a salary - if that's your situation then when creating your founder agreement just set the salary to £0 and then we'll create what we call a "founders pledge" which omits everything related to salary and employment.
Founder Service Agreement
Once you're about to do your first funding round or you've begun to pay yourself a salary from your startup, you should upgrade your founder agreement by creating a new one, this time with a salary specified. We'll then create what we call a Founder Service Agreement, which is a hybrid of the founders pledge and an employment agreement. It has many of the same provisions relating to the duties of a founder such as grounds for potential termination and protecting the company’s interests, but it also has sections that you would find in an employment agreement - such as your salary, your holiday entitlement and other absences.
How to Create a Founder Agreement on SeedLegals
You can create either of these documents in the Team section.
1) Go to Team and select add a new team member.
2) Enter the founder details and then select that they are a Founder.
3) Enter their start date, job title & salary.
To create a Founders Pledge enter a £0 salary.
To create a Founders Service Agreement the salary must be greater than £0.
For more information about how to manage your team see how to manage employees on SeedLegals - a step by step guide.
Probably the most important thing to note, however, is that both the Founders Pledge and Founders Service Agreement can establish a vesting schedule for your shares as a founder. In essence, this ties the amount of shares that you eventually own to the amount of time that you work for the company. For example, if you had 30% of the share capital with a 30 month vesting period, you would vest 1% of the shares each month, until all of your shares are fully vested and there are no longer any conditions attached to them.
While vesting might appear against your interests as a founder, it’s in essence protecting founders against each other.
If you don’t have vesting provisions, you might end up with a situation where a co-founder leaves and has a large amount of equity. This essentially renders your company un-investable as there just isn’t enough equity to go around, and keep founders, employees and investors aligned.