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A founders’ agreement is a legally binding document, signed by the Company’s founders (or a venture, before establishing a company), which determines the founders’ rights and obligations towards the Company and each other. The agreement covers various legal aspects such as the Company’s purpose, roles of the founders, commitments and representations, allocation of shares, repurchase rights, and more.
A founders’ agreement is like a prenup, and just like any relationship, everyone intends that everything runs smoothly. Nevertheless, things change, so it is in everyone’s interest to agree and decide on the “What If’s” now.
Depending on the jurisdiction and laws, founders’ agreement could contain no-sale provisions, prohibiting the sale of any shares of the Company owned by the Founders for a certain period of time, a broader language around repurchase, preemptive, rights of first refusal, etc.
The SFTS has a binding nature. It summarizes the terms and principles agreed between the founders under a binding form that is usually sufficient, to begin with.
Many forms of founders’ agreements determine how the equity of the Company is structured. This is usually unnecessary until the company is incorporated, and founders would usually rely on the advice of counsel or a CPA before deciding on issues like registered share capital or par value. Instead, the SFTS allows the founders to determine how equity will be distributed. SFTS part titled “The Founders” deals with this issue.
A Company’s name has to be approved by the local registrar of Companies. The SFTS allows the founders to define one default name and elect to determine the period until incorporation. SFTS part titled “The Company” deals with this issue.
Incorporation’s Jurisdiction affects the laws and regulations that will apply to the Company and its relationship with its shareholders (and also between the shareholders). Other jurisdictions in which the Company operates may also apply, but mainly with respect to issues that relate to employment, privacy, and other day-to-day matters. SFTS part titled “Jurisdiction” deals with this issue.
The SFTS provides for a standard and commonly used language, determining initially the Company will issue one class of shares. SFTS part titled “Equity” deals with this issue.
The field of activity of the Company is important for 2 main reasons – first, should the founders elect to use the non-compete language included under the SFTS, the non-compete provision should be limited by the scope of the Company’s field of activity; second, the field of activity can be used to define better and regulate issues like intellectual property assignment. SFTS part titled “Field of Activity” deals with this issue.
The SFTS language allows each shareholder or a group of shareholders holding together a certain percentage of the Company’s share capital to meet the required threshold of appointing members of the Company’s board of directors. Founders’ agreement tends to provide for “named rights,” granting specific founders the right to appoint board members. The “named rights” approach is less flexible and, although applicable in many cases, should be carefully considered. SFTS part titled “Board of Directors” deals with this issue. Additional information regarding the termination of a board member tenure can be found under the SAFT part titled “Termination of Tenure.”’
Under the SFTS, and except for matters specifically excluded (by way of example, the “Bring Along” provision), all matters are resolved by a simple majority.
SFTS part titled “Quorums; Meetings; Written Consents” deals with the mechanics of convening a board or shareholders’ meeting and exercising a resolution in writing mechanism.
SFTS part titled “Roles” requires the founders to describe their respective roles/titles. The “Roles” part, together with the part titled “Material Undertakings,” could help to determine whether a founder has reasonably met his/her obligations towards the Company under the SFTS.
SFTS part titled “Representations” provides for the founders and the Company’s basic assumptions when engaging each other under the SFTS.
A startup company would usually use template documents when incorporated. SFTS part titled “Initial Corporate Documents” explains that in the event of a discrepancy between the provisions of this SFTS and the Company’s initial incorporation documents, the SFTS prevails.
The SFTS includes minimized repurchase right for the Company if a founder fails to meet his/her obligations. The repurchase right allows the Company to “take away” (repurchase) a breaching founder’s unvested equity. SFTS part titled “Repurchase Agreement” deals with this issue. It would be recommended for founders to enter into full repurchase agreements, including instruments to exercise the repurchase right.
The SFTS includes standard participation rights, allowing each shareholder to participate in future equity allocations. SFTS part titled “Participation Right (preemption)” deals with this issue.
The SFTS includes the standard right of first refusal, allowing each shareholder to purchase equity from the other shareholders in the event other shareholders intend to sell or transfer their Company’s equity. SFTS part titled “Right of First Refusal” deals with this issue.
A co-sale or tag-along provision would allow a shareholder to participate and sell his/her pro-rata portion of shares in the event the other shareholder does. SFTS part titled “Co-Sale” deals with this issue. SFTS part titled “Co-Sale” deals with this issue.
A bring along or drag-along provision would allow a certain majority of shareholders to sell the entire Company by imposing their vote on any objecting or abstaining shareholders. The majority required to impose such transactions would usually be high. SFTS part titled “Bring Along” deals with this issue.
The PIIA secures the Company’s rights in any intellectual property created by the founders pre- and post-incorporation. Executing the PIIA is necessary for venture deals. Having it in place before any financing and changes to the Company’s documents and founders’ rights substantially reduces the founder’s leverage and position the Company in an improved position towards financing. Executing a PIIA at an early stage may also help to avoid tax implications caused due to late intellectual property assignment. Each jurisdiction has its own PIIA standards. SFTS part titled “PIIA” and its attached appendix deal with this issue.
The SFTS provides for an easy amendment mechanism by vote a certain percentage of the Company’s shares. Using a percentage reflecting less than unanimous consent would reduce the founders’ leverage and the Company is better positioned to change the SFTS if required. SFTS part titled “Amendments” and its attached appendix deal with this issue.
The laws and jurisdictions governing the SFTS would usually be similar to those that govern the Company’s incorporation. SFTS part titled “Laws and Jurisdiction” and its attached appendix deal with this issue.