The importance of Founders Agreement

Why sign a founding agreement?

More than one person
The Founders Agreement is intended for partners. If you are the sole founder, of course there is no need for a founders agreement. However, even if you are the sole founder of your startup, at some point you will find a VP, or chief programmer, or someone else who will believe in your idea just like you. If you are planning a long and common future, a founders agreement becomes relevant for you.

No partnership
The founders' agreement is in many cases similar to a partnership agreement, but in many cases a partnership is different. The founders do not establish a partnership, but a limited company.

The main essence of the founders' agreement: solving future problems, and describing the roles of the partners in the business

Founders agreement designed to solve future problems in advance. At the beginning of a business relationship there is a lot of agreement, there is excellent communication and there is even a high level of sympathy. But sometimes not everything stays so rosy. As part of intensive joint work on the fulfillment of your business dreams, frictions are inevitably created.

In most cases the frictions are overcome on a regular basis, but sometimes not. As the frictions deepen and become a rift in the business relationship, a situation is created between the parties where there is not much agreement on anything, no communication or there is very poor communication, and sympathy becomes anger at each other or even fear of each other. This is exactly what the founders' agreement is for.

The founders' agreement sets forth, in advance, all the agreements you have regarding the day-to-day conduct of business with each other, regarding the pre-resolution of future problems, and regarding the termination of the business relationship in the event of unbridgeable rifts between you.

Examples of issues that a good founders' agreement would include:

• The role of each entrepreneur in the project they are trying to establish;
• How many hours weekly or monthly each invests in the company;
• The share of shares that each founder will receive in the company.
• The intellectual property (patents, copyrights, etc.) will belong to the company and not to any founder privately;
• Mechanisms for leaving the company in the event that one of the founders wishes to leave prematurely; What happens to the shares of the founder in Porsche?
  Competition - Will a retiring entrepreneur be allowed to establish a competing company after retiring from the venture?
• How do you resolve a dispute between the founders? We have some ideas that can help you with that.
• Payment mechanisms (salaries or wages);
• The decision-making process in the company;
• What is the new company's financing strategy;
• Liquidation of a company - it may be necessary to restrict the right of the founders to request liquidation during a certain period which will be considered as the initial activity of the company.
  In addition, the preferred exit mechanism for the founders should be considered. For example, the right of first refusal - the duty of a founder who wishes to sell his share to offer his share to the other founders before he offers the part to a third party (usually an external investor).

When a founders 'agreement is usually signed before the establishment of the company Ltd., the founders' agreement will also include the essential elements of the future company's articles of association. For example, the division of powers between the general meeting and the board of directors; Which decisions require a special majority and which do not; What decisions can be made only at the general meeting; The company's shares - their types, the rights that accompany them and more.

Failure to sign a founders agreement in advance can be costly!
From experience, when founders do not make a founding agreement with each other and do not solve in advance the future problems between them, many times they regret this frivolity. Here are some examples:

A. Two founders wanted to make a founding agreement but because they were such good friends they in the end did not make the effort to get into the process of signing it. 11 months later, the partners stopped answering each other’s phone, barely answered text messages, and had to write a separation agreement that was much harder to write for them because they no longer agreed on anything. Each side thought the other was trying to deceive him, and it was very difficult to get them to agree on how to separate.

B. A programmer who developed a special software related to horses, sought a financial investment to finance the development of the software, and found an investor. The investor gave money and said he wanted to set up a joint venture with the programmer. After developing the horses' software, the programmer showed the investor the software, including the "source code". The investor said that in the end he did not want to set up the company, and that he wanted the parties to separate. The investor went with the "source code" to another programmer who copied the design and "algorithm" from it, and now the investor has a 100% owned business with the software 100% owned, without breaking any law and without dividing the profits and future growth of the business. And the programmer? He accepted the investment as a salary, and lost the value of his work in favor of a man who could easily fund competition in the market for which even the underprivileged programmer competes.

C. Two founders actually made a founding agreement, but did not think to define the amount of monthly hours that each one should give to the business, or the salary that each one should receive. At one point one of the founders, called the "Diligent Founder," began to work very hard, while the other "took it easy." The company has not yet generated any revenue at all, but they have nevertheless managed to finance the development activity in the company through investments. Despite this the diligent founder did not withdraw a salary from the company, in order to save the company’s funds for development. On the other hand, the other founder, who saw that there was money in the company's coffers, decided that he wanted to start receiving large salaries in order to raise his standard of living - to upgrade his car, go on luxury vacations and more.

D. The samples were not enough? If not, feel free to contact us and hear more stories.

How much does a founders agreement cost?
Founders agreement which is suitable for about 90% of cases, and will be written for two founders, will cost 6,500 NIS + VAT

When there are more than two founders, usually the price will increase by 1,000 NIS + VAT for each additional founder.

In 10% of cases a more complex agreement will be needed. For example, when a number of limited companies are established following the agreement, or when legal mechanisms are needed to handle payments to founders that depend on a number of complex conditions, or when one of the founders is an investor who requires very complex conditions in return for his investment.

Therefore the above prices are subject to a final quote to be given individually according to the customer.

The founders' agreement is required for the commencement of the joint work. We, Hodorov Law Firm, will be happy to assist in preparing a simple but professional founders agreement so that you can begin to fulfill your dream and establish the company Ltd. For a quote on writing a founders agreement, click here.