For idea-stage companies: This document 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 a 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.
The founders pledge is quite lightweight so when you start getting beyond just the idea stage and start moving towards that first rounding round, you should consider the more serious Founders Service Agreement (below) which has a much greater number of provisions.
Founders Service Agreement
For companies looking to raise funding: This agreement sets out how you and any co-founders, will work to build your business and what to do in the event of a dispute.
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 Founders’ Pledge to a Founders’ Service Agreement.
It is basically a hybrid of the founders pledge and an employment agreement that you might be familiar with. 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.
Probably the most important thing to note, however, is that it 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 their just isn’t enough equity to go around, and keep founders, employees and investors aligned.