There is often much confusion between the Founders’ agreement and Shareholders’ agreement, and at what stage in your business, you should have such an agreement, and sometimes the terms are used interchangeably. In simple terms, a founders’ agreement seeks to establish the basics of the business such as the roles and responsibilities of the founding team, equity ownership and vesting, and IP ownership and this founders’ agreement is also simply a form of shareholders’ agreement used at the initial stage and will usually be replaced by a shareholders’ agreement when the business takes on more shareholders eg. due to additional funding. The shareholders need not all be actively involved in the business.
a) Founders’ Agreement
Founders agreements are the first important documents to sign when you start a new venture. In the initial stages of your business, when getting it off the ground, it is vital to have a clear agreement with your co-founders about the key issues that will achieve the business’s objectives. A founders’ agreement is a set of obligations company founders have to each other and the company, detailing their roles, responsibilities, salary, equity compensation and more.
When registering your company, you would need a:
• Memorandum of Association, which is a legal statement signed by all initial shareholders agreeing to form the company.
• Articles of Association, which are the written rules on running the company.
The benefits of having a founder’s agreement in place are:
• Aligns expectations- having a Founders’ Agreement in place is a good opportunity to speak frankly to your co-founders at an early stage about the specific matters underpinning how the business is to be run.
• Resolve issues- having a Founders’ Agreement in place helps in resolving future potential issues.
• Good governance- Even though company law is in place, it is best to set out roles and responsibilities at the outset.
Three fundamental issues you should consider in your agreement are-
• Roles and responsibilities- A co-founding team, needs to collaborate, but it does not mean that everyone should be in charge of everything. Roles and responsibilities should be divided accordingly.
• Time- it is important to establish what time commitment each of you is expected to make, like the minimum number of hours per week you should all be investing in the business.
• Equity and vesting- this can be a delicate topic, and you must agree on how the equity will be divided to make sure there is absolute clarity about who will get what when the business launches. Not all co-founders necessarily need to take the same share. Again, it would be best if you thought about the value attached to the work and funding if any each founder is putting in.
b) Shareholders’ Agreement
The shareholders’ agreement is an effective legal action to complete the relationship between shareholders. Its legal force is less compared to that of the Articles of Association, so it must be made clear that it would override them if there is a conflict and it remains confidential.
Content of the shareholders’ agreement-
Apart from the elements related to the operation of the shareholders’ agreement (duration, termination, etc.), the main clauses that are generally found are as follows:
• The pre-emption clause: if one of the shareholders or heirs on his/her death wishes/wish to sell his/her shares, they will have to offer them as a priority to the other shareholders.
• The approval clause: the agreement of the shareholders must be obtained before a shareholder can proceed with the sale of his/her shares.
• The cap on the shareholdings: the purpose of this clause is to provide that none of the signatories can hold more than X% of the company’s capital. Usually the founding shareholders keep the majority shareholding.
• Resale right: if the majority founding shareholders receive an acquisition offer, they must ask the potential buyer to extend his proposal to the other shareholders. So everyone leaves the company at the same time.
• The inalienability clause: the shareholders undertake not to sell their shares for a certain period (eg. until the company is profitable or stable) which must be determined.
Clauses related to the functioning of the company-
• The unanimous agreement clause: this clause makes it possible to provide that certain important decisions at the company level (to be specified) require the unanimous agreement of the shareholders.
• The appointment of an officer clause: the shareholders must ensure that the person designated in the clause, usually the founder, is appointed officer of the company.
• The distribution of profit: it is, for example, possible to foresee the dividend policy practised by the company. The shareholders agree, for example, to allocate a certain part of the profit in dividends.
• A non-competition commitment: the shareholders undertake not to be interested in activities of a competitive nature to the company in which they are shareholders.
In all cases, the drafting of a founders’ agreement or shareholders’ agreement must be carried out with the support of a corporate lawyer to make your process as secure as possible and incorporate the right legal protections. Contact email@example.com or WhatsApp us on 07583452230 if setting up a company and we can assist in bespoke drafting of such important documents or visit www.bizlawuk.co.uk to find out more about how we can help you, follow our useful social media posts, like and share to help others.