Founder Agreement · Founder equity

When should I form my Founders Agreement and should I seek legal advice?

Chukwuma Okpalugo Business School student

Last updated on December 4th, 2017

To all the co-founders with Founders Agreements: (1) How much time and money did you spend on it? (2) Did you get legal advice? (3) How long after agreeing to work together did you start working on it?

Dimitry Rotstein Founder at Miranor

December 4th, 2017

1. I've never spent any money on a Founders Agreement. I did ask a few lawyers and they wanted something between $1000 and $4000 for it. Given the number of co-founders I've had over the years, I'd be bankrupt if I agreed to that. So, I just found ready-made templates and adapted them to my needs myself. Took me something like 10 hours each time, including back and forth revisions, going over all the points with the potential co-founder, etc.

2. I don't recall ever getting any formal legal advice on this matter. I have read articles, written by lawyers, but I don't know if that counts as an advice. Anyway, here's my take on this, based on what I know and experienced myself (that's not a legal advice, of course):

There is no need for professional help with the founders agreement before there is something worth suing about, like substantial revenues or the first investment round. If and when these conditions are met, then by all means have a lawyer go over the agreement. In other words, only spend money on legal advice when it's a small portion of REAL money (not potential) that needs to be protected.

3. Typically, when adding a new team member (or becoming one), I start with a basic trial period of 2-3 weeks. The agreement for such a trial is pretty short, but it should be specified immediately and in writing (usually in an email): "We agree to work together on this project until DD/MM/YYYY. If on this date or earlier we unanimously decide to continue working together, we will sign a full Founders Agreement. Otherwise, we will go our separate ways with no further obligations or claims of liability from any side to any other side." A separate NDA and non-compete may be signed in addition to this, though I don't normally do or request such a thing.

But once the trial period ends and we decide to continue, I write the agreement as soon as possible (preferably days, not weeks), while informing the other party that the trial period is being extended until the full agreement is signed.

If you need more details or advice, you are welcome to send me a private message.

David M

December 6th, 2017

@dimitry, I have to now disagree with much of the sentiment of your second post. One should NEVER assume the start up will fail. That is a very wrong approach to entrepreneurship and a reason so many lawyers exist. Certainly, an entrepreneur does not want to get too bogged down in "what ifs", but they also need a healthy dose. And legally, one should absolutely plan for success, not wait till it is just around the corner as you suggest. I use the example of an entrepreneur I know who painfully shares the story of an IPO, that because the company had not planned for success netted him $25M while bringing over $200M to two partners who had little to do with the success of the company, one who had not been present for the last year and a half. Now maybe that is the extreme in terms of success. The Social Network's illustration of not having an anti-dilution clause is even more extreme. However, the failure stories are FAR more extensive. Having the proper legal documents in place at the beginning to be covered for failure is as important as planning for success. So either way your sentiment to this is a risky one at best, and a very dangerous and near sighted one at worst.

Steve Owens Startup Expert

December 6th, 2017

Take it from someone who live it - it is very depressing to spend a ton of money, and years of your life, and then lose it all because you did not want to spend a few thousand on a lawyer and tried to do it yourself. As I now know, amatures will cost you a lot of money - surround yourself with the best - no expectations.

Bob Chalfant Assistant Professor of Entrepreneurship, Notre Dame College

Last updated on December 7th, 2017

Hi Chukwuma,

I see from your LI profile that you are an MBA student at my own alma mater. Take a walk over to the law school where they have 19 clinics, at least one of which can help you write all your agreements and contracts. Probably for free. Starting a business while in school gives you access to resources that you could not afford outside of school, including the reference library. Congratulations on finding a problem that you feel important enough to create a business to solve it.

Dane Madsen Organizational and Operational Strategy Consultant

December 4th, 2017

I have been paid tens of thousands of dollars advising people who thought they did not need an attorney and wrote their own agreements. In one case, this decision generated $350,000 in legal fees alone (while the ligation nearly crippled the company) because they wanted to save $5000. I am currently advising a company with an incredibly bad agreement and naive terms in a break up of the founding team. The only time this decision does not haunt you is when the company fails.

Susan Friedricks Creative, Down To Earth Social Entrepreneur

December 7th, 2017

You make some very good points. Am a startup founder, expect success, and would like an initial agreement. Points are made here about Templates available, and moderate priced law firms, both of which seem like fine ideas. Would like to know examples of the templates you've used, and names of any law firms that specialize in start-up agreements without charging $5000. That information would be most helpful.

David M

Last updated on December 5th, 2017

Dimitry makes some good points. At the same time I would suggest legal advice if possible. HOWEVER, legal advice from an attorney who is competent in the matter. Research and interview them. I have seen $850/hr attorneys draw up very poor contracts, or contracts with major simple mistakes, so don't be wowed by the attorney's firm or even client list. Look at his experience in deal successes. Point being, an attorney doesn't mean anything if they are not a good one. As for when to do it, I like Dimitry's idea. Personally, I won't do any major work for any company without agreements in place. As for money, obviously depends on extent of contracts. A $5,000 retainer will take care of most of what you need in terms of standard setup most likely.

Dimitry Rotstein Founder at Miranor

December 6th, 2017

In light of other comments, perhaps I should clarify some points I made earlier.

On one hand, a solid and expertly crafted Founders Agreement is very important, and it must clearly define several key aspects of a partnership, especially how to initiate and handle a breakup.

On the other hand, paying thousands of dollars for every agreement is unsustainable in most cases, especially since the chances that an agreement would need to withstand a legal process are small, if only because most startups fail before there is any cause for legal trouble, in which case all this money was wasted for nothing.

So, what I would do (and actually have done) is to get by with a self-made agreement (based on freely available templates) until the initial success is right around the corner, e.g. in a form of revenues large enough to pay for the agreement or just before starting an investment round (or, better yet, the moment a potential investors gets serious).

The real trick here is not to miss the moment when it becomes serious.

One time I missed that moment, the investor entered the picture too quickly, before we had any founders agreement in place (less than two months after starting to work together) and it resulted in a very ugly breakup with hundreds of dollars in legal fees, and the investor run away screaming (figuratively speaking).

However, I should note that in this particular case, even having a preliminary, self-made agreement would probably be enough to resolve the situation (though who knows).

Curt Sahakian Attorney

Last updated on December 7th, 2017

1. If you are doing things on a shoestring you probably don't have the money to do it right.

2. If you do it yourself, you will probably screw it up. This is so even if you use pre-existing forms... perhaps expecially if you use pre-existing forms. You won't even know what the appropriate type of "Founders Agreements" for your circumstances are.

3. Even if you have the money to do it right at an early stage, it is hard to do it right because of the early fluid nature of just what your business is and who your co-founders are.

SIMPLER SOLUTION. A simpler solution is to refrain from having any co-founders (or promising away more than 33% of your equity) until you have enough substance and traction such that

(a) you have good vision of what your revenue generating business is, and

(b) you actually have some paying customers, and

(c) you know who you want as your "junior" founders.

While this isn't a perfect solution, and may be objectional to some, it may be the best solution many.

Steve Owens Startup Expert

December 4th, 2017

Get legal advice. Many law firms that specialize in startups (not just a sideline, but their primary focus) can do this very cheaply.