"Legal Corner: Founder’s Agreements”
By: Michael A. Balascio and Michelle Rutherford
In the world of startups, things rarely go according to plan. In both success and failure, startup founders frequently find themselves in positions they could not have foreseen when they first started their business ventures. Even after highly publicized disputes, such as those involving the founders of Facebook and Twitter, startup founders continue to make the same mistakes.
In the fall of last year, Snapchat settled with Reggie Brown, an ousted co-founder, for an undisclosed amount after protracted litigation that threatened to derail the entire company. Brown originally sought over a billion dollars in connection with Snapchat's rejection of a three billion dollar offer from Facebook. Snapchat started off as a handshake deal in a dorm room at Stanford University. By not clearly memorializing their agreement, though, the founders of Snapchat put their successful enterprise at great risk. While it may be impossible to predict where your business ideas will take you, lack of predictability makes it all the more important to prepare your startup for all possible scenarios. One of the best ways to prepare for the unexpected is to memorialize your plans in what is often referred to as a founder’s agreement.
Founder’s agreements, also often called the prenuptials of the startup world, serve the purpose of preparing the founding parties for “what if” situations. The fact is, many businesses begin with individuals who have close relationships to each other, or at the very least, share in a meeting of the minds. A founder’s agreement is a plan that spells out what will happen in the event that the initial period of overwhelming agreement comes to an end.
But a founder’s agreement can, and should, be much more than a failsafe. The agreement can also serve as a guide for company decision makers when facing tough choices. In this respect, the agreement should clearly state the ultimate goals and ideals of the company. A clear agreement at the beginning of your endeavor will help decision makers stay true to the initial goals of the organization. While being clear on organizational goals, the agreement should also be a living document that continues to evolve with the structure and nature of the company.
So the question is, what should my founder’s agreement contain and how should my startup go about creating one? While there are many issues you could potentially address in a founder’s agreement, pay particularly close attention to:
- The roles and responsibilities of each of the founders.
- The manner in which various types of decisions will be made.
- How ownership will be assigned and whether it will be vested over time.
- How IP will be assigned in the case that the company dissolves.
- What happens if someone wants to leave and how they can leave without penalty.
- Whether and how someone, particularly a founder, can be forced out.
- How the company will address potential buyout offers.
The founder’s agreement should be one of the first legal documents completed by the starters of the business and should encapsulate the vision they are striving to achieve. Even if your startup has gotten off the ground successfully without a founder's agreement, it is never too late to create one. While the agreement’s terms do not need to be determined with an attorney, it is important to solicit an attorney’s advice in making sure the language of the agreement has the necessary formalities to be enforceable. While creating a founder's agreement may be the last thing on your mind as you get your startup going, you'll be glad you took the time to put your goals and agreements on paper.
About Legal Corner
Legal Corner is a recurring column in Silicon Bayou News, featuring a discussion of legal issues relevant to entrepreneurs and start-ups. Legal Corner is authored and edited by Michael A. Balascio and Michelle M. Rutherford, associates at the New Orleans-based law firm Barrasso Usdin Kupperman Freeman & Sarver, L.L.C. Michael and Michelle have significant experience advising small companies and start-ups with strategic and legal decisions. They are both licensed to practice law in Louisiana – with Michael also licensed in Massachusetts and New York, and Michelle in California. Ross Peyser, a third-year law student at New York University School of Law, assisted in preparing this article.
About Silicon Bayou
Silicon Bayou News is the leading source for tech and entrepreneurial news in Louisiana. Silicon Bayou's goal is to put a spotlight on the great things happening in Louisiana and provide a common virtual space for community discussion and collaboration.
About Barrasso Usdin Kupperman Freeman & Sarver, L.L.C.
Barrasso Usdin Kupperman Freeman & Sarver, L.L.C. is a litigation law firm located in New Orleans, Louisiana. Our experience includes all types of commercial disputes, mass actions, multidistrict litigation and class actions, environmental, product liability, and insurance bad faith and coverage cases, and securities arbitrations, litigation and regulatory matters.