Operating (or Founder) Agreement templates

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What is a Founders/Operating Agreement?

A Founders/ Operating Agreement is a document used to ensure that disputes are kept to a minimum between co-founders, usually in a pre-incorporated business. The document is not legally required to form a business; however it is a good idea if there is more than one founder. The agreement is intended to outline the roles and responsibilities, equity ownership and vesting, and the assignment of intellectual property. If a startup is created between a group of friends or people who trust each other, they may find it unnecessary to draw up a founders (or operating) agreement, however it is often underestimated the number of issues that have the potential to arise between founders. There are many things that people don’t think about- or know about- before starting a business, and so a founder’s agreement can help to ensure clarity and formalize the relationship between co-founders in a business sense. As well as this, if a startup is formed somewhat quickly or rashly off the back of a good idea, lines can become blurred around topics like IP. All too often, good business ideas fail due to the lack of agreement or cooperation between co-founders of a business, so this agreement will minimize the risks of that happening.

What should be Included in a Founders/Operating Agreement?

1. Roles and Titles

This may seem redundant in the early stages of a company, because generally everybody chips in to do what needs done. While this is essential to get a business up and running quickly with the help of teamwork and collaboration, you may find down the line that there is confusion with regards to ‘who does what?’ and, ‘who is who?’ Confusion may lead to disputes between co-founders over what each person’s title should be and why. Eliminate this risk from the start by outlining the roles and the titles of each co-founder in your founder’s agreement.

2. IP Assignment

When referring to valuable intellectual property, disagreements can arise regarding its ownership. If it was created before the formation of the company, there can be confusion as to whether the intellectual property belongs to the person or to the business. It is important to establish this up front and include IP assignment provisions in your agreement.

3. Equity Ownership

This can be an awkward conversation when the business is just starting out and isn’t worth very much, but it’s important to get it out of the way. Co-founders need to decide whether the equity should be split equally or whether it should be split depending on each founder’s contribution of value to the business. As well as this, the founder’s equity should be outlined in the agreement as all subject to vesting in the case of a co-founder leaving. This means that he/she forfeits the unvested portion of equity.

4. Capital Contributions

Any contributions made by founders whether cash or assets should be noted in the agreement.

5. Decision Making

In the cases where all founders should have a say in certain decisions, you should outline in which cases this applies. Meaning, what types of decision will require consent from all founders?

6. Founder Removal or Resignation

This is an important thing to address in a Founder’s Agreement. Although every founder has good intentions at the start, people lose interest or other things get in the way and they stop pulling their weight; it’s easily done. The Founder’s agreement should lay out the process and the conditions regarding removal or resignation of a co-founder.

7. Confidentiality

It is advised that all founders are bound by confidentiality within the confines of a founder’s agreement so that no confidential information is disclosed to third parties that could be harmful to the business. In the case of this happening, there is a clear reasoning in place to take them up for breach of contract.

8. Dispute Resolution Process

Hopefully having a founder’s agreement in the first place doesn’t leave much room for disagreements if most things have been laid out in detail, however if they do arise, having a dispute resolution process outlined in your agreement can bring arguments to an end faster.

9. Distributions

Depending on what each co-founder has contributed, there may be expectations as to what they should receive in terms of additional equity ownership as the business grows. An agreement surrounding this topic should be stated clearly within the contract.

10. Duties to the company

Sometimes opportunities will arise for founders outside of the company. What is seen as acceptable and what is seen as unacceptable for a founder to partake in should be included in the agreement to avoid disputes.

For additional reading:

10 Provisions You Should Always Consider

How to Create the Perfect Co-Founder Agreement

The Definition of an Operating Agreement

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