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How To Create A Founder's Agreement in India

How To Create A Founder's Agreement in India

INTRODUCTION

An agreement that should not be in oral but written form with the help of the legal experts is sort of a formal document that decides and assigns the roles and tasks to the people working in any company or firm. This is basically to avoid confusion and conflict of interests and duty between the founder and co-founders in incorporation. A founder's agreement is a legal contract between two or more people that want to start a company. It outlines who owns what and how profits will be divided among partners. It also states how many shares each partner will own in the company and what happens if someone wants to leave. 

It is important for all the founders to understand that this is not a legal contract but rather a business document that should be used as guidance for setting up their relationships with each other. A lawyer can help with this process as well as provide advice on what should be included in it. The founder's agreement can include any or all of these clauses: equity, voting rights, vesting, buy-sells, intellectual property rights, exit strategy, and compensation among others.

The best example of a Founder's agreement is the one between the co-founders of Facebook. The agreement sets the stage for all future co-founders who agree to be governed by it.  Who could have thought that an agreement made for a company which was launched on Feb 4, 2004, would be worth $45 billion in 2012? 

BASICS AND REQUIREMENTS

To know how to make a founder's agreement, initially, we need to understand a few basics:

  • The co-founders of a company basically represent its life force. Therefore, they have to agree on what they need and do not need in the business.

  • They should also set standards with regard to Intellectual Property (IP) and determine how it will be utilized and distributed as well.

  • They define the co-founders' roles for the company as a Chief Executive Officer (CEO), Chief Operating Officer (COO) or Senior Vice President (SVP). 

  • The founders should decide how equity shall be distributed among themselves.

  • They have to decide how long the company shall last before winding it up.

  • The founders should agree on the procedure of winding down and dissolving or selling the business.

  • It is very essential that the agreement should not be seen as a legal document and should not be written simply on paper. To ensure that, we need to take some advice from an expert lawyer who can give us value-based legal assistance so that we do not end up paying more than what we expected.

INDIAN LAW & FOUNDER’S AGREEMENT

The Indian law does not have any specific provisions for a founder's agreement. It is the responsibility of the founders to draft a founder's agreement that suits their needs.

There are some steps that can be followed in order to create a founder's agreement in India:

  • The first step is to identify the type of company that you want to create and then decide on its legal structure. There are three types of companies in India: Private Limited Company, Partnership Firm, and Sole Proprietorship Firm. The legal structure will determine what kind of agreements you need to draft for your startup company.

  • Once you have decided on the type of company, you need to decide whether there will be one or more founders in your startup company and what will be their respective shareholding percentages.

STEPS TO CREATE A FOUNDER’S AGREEMENT IN INDIA

A founder's agreement is a document that outlines the rights and responsibilities of founders in a company. It also defines the parameters for how founders can exit the company.

  • Identify your co-founders and what percentage of equity they will own.

  • Determine who will be in charge of what tasks, including hiring and firing employees, raising money, and making key business decisions.

  • Establish an exit strategy for when one or more co-founders want to leave the company.

  • Agree on how much money each founder should contribute to the company at different stages, such as when it hires employees or raises funds from investors.

IMPORTANCE OF FOUNDERS AGREEMENT

A founder's agreement is considered an important document that outlines the rights and responsibilities of the company’s founders. It is a legal document that is designed to protect the company. The agreement should be signed before the company starts trading or before any money changes hands.

The agreements vary from country to country but typically include:

  • A statement of capital,

  • The shareholding percentages,

  • The voting rights and

  • Rights and responsibilities of each party.

CONCLUSION

The founder's agreement is a legal document that outlines the terms of the company and its relationship with co-founders. It also provides a way for co-founders to exit the company. The founder's agreement can be an important document for entrepreneurs. It is a legal contract between founders and outlines the terms of their relationship with each other, including how they will share ownership in the company, what happens if one of them leaves or dies, and how they will divide profits if they sell their shares.

eStartIndia will help you draft all kinds of legal agreements from the comfort of home.

Get a Free Consultation for Founders Agreement with Our Top Rated Experts with a simple registration.

Author:

Komal Sharma
Delhi
Adv. Komal Sharma, University of Delhi


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