Securing Your Future with Founder Agreements
In the business world, clarity is not just a virtue—it's a necessity. As entrepreneurs chart their course, founder agreements stands as the beacon that ensures this clarity.
Too many promising businesses fail because the founders did not take these initial steps. As a mentor of mine once said, “Going into business with someone is like hopping into bed with them. So bring protection.”
Let's delve into why these documents are foundational to your business's success and how they can safeguard your journey.
The Election of Directors
While the Shareholders are the ultimate owners, many of the strategic decisions of a corporation fall upon the Directors (though for most startups, the Shareholders and the Directors are the same people).
When a Corporation is first established, the first thing to do is to figure out who will serving as a Director. Going forward, when any major decision is being made, it is the Directors who must sign off on it.
This includes things like issuing shares, one of the most important steps for any new corporation to take. This is done through the Director’s Resolutions.
Director’s Resolutions
The first Director's Resolutions issued by a corporation are crucial, establishing the foundational decisions that will guide the company’s initial operations and governance.
The following are some of the key issues the initial Director’s Resolution will deal with:
1. Adoption of Bylaws
What It Is: Bylaws are the internal rules that govern the corporation. The first resolution often includes adopting these rules.
Why It’s Important: It sets the stage for how the corporation will be run, including the roles of directors and officers, meeting protocols, and other key operational guidelines.
2. Election of Officers
What It Is: This resolution names the corporation's initial officers (e.g., President, Secretary, Treasurer, or CEO, CFO, COO).
Why It’s Important: Officers are responsible for the day-to-day management of the corporation. Electing them formally empowers them to take ownership over their work, and is essential for communicating the person’s role to the outside world.
3. Authorization of Shares
What It Is: This involves formally deciding how many shares the corporation is authorized to issue and the types of shares (such as common or preferred).
Why It’s Important: It’s a foundational financial decision that impacts the corporation’s equity structure and ability to raise capital.
4. Issuance of Shares
What It Is: The resolution to actually issue shares to the founders or initial investors.
Why It’s Important: This formally divides ownership of the corporation, providing capital for the business and officially allocating ownership percentages. Most companies will also include a vesting agreement alongside this initial issuance, to ensure that the company is protected if a founder leaves.
5. Banking Arrangements
What It Is: This includes resolutions to open bank accounts in the corporation's name and designate who has the authority to operate those accounts.
Why It’s Important: A corporation needs a place to keep its money and a way to manage its funds securely and effectively.
6. Appointment of Accountants or Auditors
What It Is: Designating the corporation's official accountants or auditors.
Why It’s Important: Ensures the corporation's finances will be properly managed, reported, and audited, which is crucial for transparency and compliance. However, many early-stage companies will waive this, until they are generating significant revenue.
7. Establishing the Fiscal Year
What It Is: Setting the start and end dates of the corporation’s fiscal year.
Why It’s Important: It determines the financial reporting period, which is essential for accounting, tax planning, and performance analysis.
8. Adoption of Corporate Seal or Logo (if applicable)
What It Is: Some corporations choose to adopt an official seal or logo.
Why It’s Important: While not legally required everywhere, it can be a formal symbol of the corporation’s identity.
9. Any Other Initial Matters
What It Is: This could include resolutions on leasing office space, approving contracts, or any other initial business the directors need to address.
Why It’s Important: It allows the corporation to start operations with all necessary tools and agreements in place.
Shareholder Agreements
Once the shares are issued, it is important to be able to set up a shareholder agreement.
A shareholder agreement is a contract between the shareholders of a company. You can imagine it as a rulebook that governs the operations, decision-making processes, and dispute resolution within a company.
A well-drafted shareholder agreement anticipates potential conflicts and outlines procedures for addressing them, thereby avoiding costly and divisive disputes down the line.
Vesting plan
In addition to shareholder agreements, it is vital for many early stage startups to put together a vesting plan. This will allow equity to “trickle” in, as opposed to being given out all at once.
Why are vesting agreements so important? Because as an entrepreneur, you don’t want to give out all the equity all at once. No one is entitled to shares just for being there at the founding of a company. Typically, people would have to earn their shares.
Vesting plans ensure that the early stage founders stick around for at least some time before their stake in the company is locked in. This way, if any of the founders leave, or fail to deliver on their end of the deal, the company can reclaim that equity, and use it as an incentive for their replacement, or even sell the shares to bring on paid employees.
Why Businesses Need Solid Founder agreements
The process of creating founder agreements should not be seen as a mere legal obligation but as a strategic exercise that can significantly impact the future stability and growth of your company.
Clarifies Rights and Obligations: founder agreements spells out the rights and obligations of all parties. reducing uncertainties and the potential for conflict. This includes questions like who owns what, but also who is entitled to make which kinds of decisions.
Facilitates Decision Making: By establishing clear guidelines for decision-making processes, these documents ensure that the company can operate smoothly and efficiently.
Protects Minority Shareholders: Good documentation includes provisions that protect the interests of minority shareholders, ensuring that their rights are not overlooked.
Manages Transfers, Exits, and Succession: It outlines the terms under which shares can be sold or transferred, addressing situations such as the departure of a shareholder due to retirement, death, or sale.
Attracts Investment: Comprehensive and clear shareholder documentation is essential for attracting investment, as it demonstrates a well-organized and professionally governed enterprise. Reviewing shareholder documentation is often the first step in investor due diligence.
Navigating the complexities of shareholder documentation can seem daunting, but you don't have to do it alone.
At Apex Corporate Law, we specialize in crafting shareholder agreements and related documentation that align with your company's vision, culture, and long-term objectives.
Schedule a Consultation with us today, and let’s ensure your shareholder documentation is a cornerstone of your company’s success story.