What Is a Founders’ Agreement? And Why You Need One
webmanager • May 17th, 2023
When starting a company, all Founders have goals, aspirations, and practical ideas about how the company will run and evolve.
You’ve likely had all-night conversations about what roles you will play in the business, how the business will be structured, your ideal exit strategy, and many other decisions.
A Founders’ Agreement puts all of these decisions into writing.
Simply put, a Founders’ Agreement is a contract between all founders where rules, responsibilities, and rights of the business owners are defined.
In this blog, we’ll tell you exactly what should go into a Founders’ Agreement and why having one is so critical to your business.
Let’s dive in.
The Founders’ Agreement is essentially the blueprint of your company, and should be created before the business entity is even formed.
It’s a document that solidifies your agreement as founders – i.e. the venture’s basic structure, basic owner roles and responsibilities, and share of ownership – and is designed to protect all founders’ interests as the company evolves.
Without a Founders’ Agreement in place, you run the risk of debilitating disagreements and/or future lawsuits between owners about the fundamental structure of the company.
It’s important to have the Founders’ Agreement drafted and reviewed by lawyers, as it is a legally binding agreement.
While there is no one template that business owners must follow, all Founders’ Agreements should address the critical founding decisions of the company.
We’ll focus on a few top items here:
It might sound silly, but make sure the Founders’ Agreement includes the business name, even if it’s going to be changed later. It should also include a full list of all founders and any employees involved with the agreement.
When it comes to structuring your business, there are a few questions that you’ll need to address in the Founders’ Agreement.
We recommend watching this video about the QSBS capital gain exclusion to help, and get advice from your lawyer and your Tech CPA.
Every founder of a startup contributes something, whether it’s cash, property, or services rendered. If you contribute anything other than cash, you will need to figure out the monetary value.
Therefore, you’ll need to contractually agree on how much equity the founders will receive, and who is going to be involved.
Here are a few tips:
This may sounds basic, but incredibly important. The salary and compensation should be stated in the agreement with details on exit payout to clear any mismatching expectations that founders may have down the road.
It’s also important to understand how founders’ shares are taxed – early on and in future.
Founders who receive early stocks face little or no taxes.
Founders that receive stocks after they have appreciated will be taxed at a higher rate, and will be faced with a higher tax liability.
We strongly recommend consulting your lawyer and Tech CPA for assistance when drafting the Founders’ Agreement.
While you may not see the agreement as a priority right now, it’s a critical document that will save a lot of headaches and legal disputes down the road, and should be reviewed by a professional.
A Tech CPA can help you understand the tax liabilities of your business setup and equity structure, and help you create a more favorable tax strategy for all founders involved.
If you don’t currently have a tech CPA, you can book a complimentary call with one of our accountants any time. We’re here to help.
Until next time!
Samy Basta brings you more than 20 years experience in tax, financial, and business consulting to his role as founder of Basta & Company. His focus is primarily strategic business planning, empowering clients to set priorities, focus energy and resources, and strengthen operations. In addition, Samy and his firm provide strategic counsel, and technical insight, on a wide range of needs, including tax saving strategies, tax return compliance, as well as choice of entity.
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