"Founder Agreement" is an agreement which is drawn in between the founders/promoters of a company on crucial problems in concerns to their company.
Why do we need it?
To detail good understanding, obligations, rights and responsibilities of each party to the FA and align their objectives. To keep a record which will avoid uncertainties in future? To attend to allotment and circulation of resources.
When to go into such contract?
- At the time of tabling the idea;
- At the time of incorporation;
- At the time of capitalization.
Requirement Terms & Conditions of a FA
Equity Investment and Shareholding Structure: Who should hold how much shares? Equity needs to be divided based on contribution of each of the creators respectively. Board Management and Governance: How many creators to be on the Board and why? How the company is to be governed?
Roles & Responsibilities: Divide functions and obligations on top management. Shareholders' Meeting: Frequency of conferences, licensed people in the conferences. Fresh Issue and Transfer of Shares: Issues such as Lock-in durations, creator offering his stakes, Right of First Refusal, transfer upon death, and so on
Approval of Debts: What will be the treatment to authorize action which might sustain financial obligations to the company? Appointment and Removal of a CEO: It must be concurred regarding how creator(s) will designate and eliminate the CEO. Confidentiality, Non-Compete and Non-solicit: A creator not to participate in any activity (espionage, breach of privacy) with other entity which would endanger or be unfavorable to the company's interests or would straight take on the company.
Representation and Warranties: Founders are limited from participating in other agreements which would restrict their commitment to the company as well as, avoid any 3rd party rights over the Intellectual Property of the creator(s)/ company. Amicable Exit from business: A method regarding ways to leave from business ought to be developed.
IP Rights: Intellectual Property Rights ought to be in accordance with the company and in case of collaboration, to all the partners. Indemnity: Founders to indemnify the financiers for the loss triggered by misstatement or guarantees offered to them.
Governing Law and Dispute Resolution: The FA needs to point out the laws to be followed and the procedure of conflict resolution.
Statutory Law References
Sec. 2(h) of the Indian Contract Act, 1872.
Crucial Do(s) and Don’t(s).
It ought to be a written contract to get rid of uncertainties. It ought to be participated in at the time of incorporation of the company . Ensure the legality of the agreement and its appropriate execution .Do not attend to severability of stipulations as it is not acknowledged under Indian laws, Articles of Association need to consist of the arrangements of FA . Above all, attorney assessment is needed to prepare the contract so regarding examines the legalities.