Definitions

Apart from the name of the founders and the enterprise, it is advisable to define the potential of the business venture with utmost clarity. This should be done by way of clearly laid out terms defining the vision, goals and proposed milestones of the business.

Capital

This clause (or clauses) should state the initial investment made by each founder, as well as any additional capital contributions that may be needed in the future from the founders for expansion and operational needs.

Ownership

Ownership clause deals with equity held by each founder, either by percentage, or the number of shares held. The contribution provided and the role played by each co-founder helps determine his share in equity.

Roles and responsibilities

• This clause is crucial to pre-empt any ambiguity by clearly specifying the role of each founder.
• Further, every co-founder owes a certain duty and responsibility to each co-founder as well as the enterprise; and the same must be accounted for.
• Roles and Responsibilities clause will also play a significant role in determining the decision-making power of each founder, as well as possible future relations with the Board of Directors.

Compensation

The agreement should also specify the amount compensation provided to and/or salary drawn by each co-founder, as well as the manner of reimbursement of expenses.

Exit of founders

• Although this is a situation that every startup would want to avoid, in order to prevent any unpleasantness in the future, an exit clause must form part of a founders’ agreement.
• There must be a provision for the case(s) in which a co-founder may choose to leave the enterprise or be removed from the company. Reasons for the same may vary and may include reasons of death and illness.
• Thus, it will prove to be advantageous to specify a procedure governing every conceivable situation.

Dissolution

This is an essential clause with respect to the possibility of winding-up and liquidation of the enterprise. The manner of distribution of money and other resources amongst the founders in the event of liquidation must be provided.

Dispute resolution

• It is always helpful to create a mechanism to provide for the resolution of any disputes that might arise in the future.
• Clauses specifying the manner of resolution of certain disputes may prove to be of aid if the founders wish to avoid a court case to the best possible extent.

Miscellaneous provisions

• Provisions like non-compete clauses, assignment of Intellectual Property rights, loans from founders, severability, etc., usually feature in such contracts.
• A non-compete clause is meant to prevent a co-founder from quitting and starting a similar business in the future.
• If the company has availed any loan from the founders, the manner of repayment of loan and payment of interest on the loan must be defined.
• To avoid future disputes, intellectual property rights of a business should be jointly assigned in the name of all the co-founders. Not only does it serve as protection against disputes, it also serves as the acknowledgment of the wit and effort of each founder that goes into the business.
• A severability clause states that the terms of a contract are severable, that is, detachable from each other. Incorporating a severability clause into the agreement helps because even if some terms of a contract are rendered invalid due to any reason, it does not make the entire contract invalid.
• A formalised and written founders’ agreement is always better than an oral contract. Further, a written contract should be drafted with the aid and assistance of a legal professional so as to create a watertight agreement without any loopholes that can be exploited.