16+ SAMPLE Startup Agreement
What Is a Startup Agreement?
A startup agreement, also known as the founder’s agreement, is a legal contract that an individual presents to their co-founders for the pre-incorporating process of a startup business. The document covers various elements and defines the roles, responsibilities, and liabilities of the people starting up a small organization. The agreement also aims to distribute the intellectual property rights to each business partner of the startup. The startup agreement is vital to demonstrate the seriousness of an individual to pursue starting up a business. It is also advisable to create the contract at the beginning of the lifecycle of the company to get every individual on the same page. The startup agreement serves as the pillar of every starting business, no matter the industry. It aims to set the tone and lay down the foundation of interacting and managing the organization with a team. While it is not mandatory to write up a startup agreement for a starting company, having one comes in handy to ensure that everyone has a clear comprehension of every critical financial and legal issue that surrounds the business.
According to the statistical data from Statista as researched by the Statista Research Department about the number of businesses less than a year old published in January 2021, over 804 thousand businesses are less than a year old and still in their startup phases in 2020.
Components of a Startup Agreement
While there is no standard format when it comes to writing a startup agreement or a founder’s agreement, the individual responsible for writing the startup agreement must be aware of the terms and conditions that are essential to make a comprehensive and enforceable agreement. The section below elaborates the necessary components of a startup agreement that the company must possess. Read the following items and their definitions to gain a better understanding of the agreement.
Name of the company and founders: This section of the startup agreement is non-negotiable. Indicate the numbers of every member of the founding team first. The name of the startup business must also be visible, even if the members plan on changing it later on. Do not underestimate the significance of having a startup name for the company. Some people find the process troublesome, but it is through a recognizable and unique name that consumers can recognize the organization, enabling the company to move forward and achieve its goal statement.Ownership framework: The ownership structure determines the percentage of ownership each member owns. The numbers can vary depending on the people leaving or joining the company. Take note that if an organization is a limited liability company or LLC, there must be an indication of the management interest that belongs to each member. The startup must determine if each founding member is an owner in an economic sense or will actively participate in managing and running the business.Project: The project refers to the proposed startup company. This section contains a brief explanation of the company mission and vision statement in a sentence or two. It must indicate a broad overview of what the company does and specifics that are unique to the organization. The overview of this section serves as the elevator pitch, and the specifics provide more detail on each action plan the company initiates.Starting capital and additional contributions: The founding team members have their respective contributions to the startup company. These contributions are either in cash, property, promissory notes, rendered services, or a combination of the above. If one of the co-founders gave a contribution other than cash, there must be a specific monetary value that is present in this section. Information about the possible continuation of the capital contributions or initial investments is also in this section of the agreement.Expenses and budget: The expenses and budget section of the startup agreement are about handling the possible budgets and expenses rather than writing out monetary values. It also talks about budget approval processes, expense reimbursement procedures, and reimbursement requests. Taxes: Writing down a tax section is necessary for the startup agreement. It is also advisable to consult a tax professional when writing this section of the document. The contents must be specific to the company and its organizational structure. It is best not to copy from any templates and invest some time in writing the taxes of the company.Taxes: Writing down a tax section is necessary for the startup agreement. It is also advisable to consult a tax professional when writing this section of the document. The contents must be specific to the company and its organizational structure. It is best not to copy from any templates and invest some time in writing the taxes of the company.Roles and responsibilities: Most founders and co-founders talk out each other’s responsibilities through verbal communication. However, having no written records of the conversations will be troublesome later on. There are instances when founders do not have a set definition of roles, and many instances can happen. For one, a person will not work if the role is not interesting enough for them, some work on tasks and leave it incomplete for someone else to finish, and some only handle specific tasks. In such situations, it becomes difficult to adjust the roles of each individual since there is that one person that does everything that the others refuse to do. The result is usually the collapse of the company. That is why the founder and co-founders must define the roles and responsibilities of each member in the startup agreement. Through identifying each person’s obligations, each person knows their limitations and prevents the rehashing of each other’s tasks.Management: The management section incorporates information about decision-making procedures, operating, and approval rights. It contains details about voting rights in company decisions, allowed votes on particular issues, voting rights according to the investment, and limited voting rights. The section also tackles issues on vetoing rights, supermajority voting, and managerial rights without voting rights. Equity and vesting: This section of the startup agreement talks about topics like stocks, shares, equity, vesting, and fair market values. When it comes to learning about startup equity compensation, there are many associated words that you have to know to understand the concept fully. Chances are, an individual will know about these words but do not have sufficient working knowledge to describe and comprehend them. Startup equity refers to the degree of ownership of the stockholders in a particular company. When computing for the startup equity, most companies calculate the degree of ownership an individual has according to the number of shares they own over the total number of shares of the company. The startup agreement must be clear on the data in this section to promote parity and fairness.Salary and compensation: The salary and compensation section focuses on the fair division of payment to the founder and co-founders. It is necessary to tackle the situation in the startup agreement as talking about anything of fair monetary value can become disruptive in overall company operations. Every startup business is different, and the same goes for founders and their relationship with investors. There are various startup founder compensation policies, and their positive and negative effects depend on the culture and structure of an organization. Intellectual property: Intellectual property or IP represents the unique features that the founder and co-founders incorporate into the company. It is necessary to determine the intellectual property. The section must mention how the company stands out from its industry competitors and startup production procedures. It also discusses blog posts, app ideas, designs, and other ideas that are specific to what the company does and aims to accomplish. Anything that the company develops within working hours is IP. The section must also consider the situation of selling intellectual property. It must detail the decision-making body, voting processes, and revenue allocations. The section must also discuss non-compete agreements and confidentiality clauses that ensure that the founder or co-founders do not engage with industry competitors or become a competitor in the long run.Removal or departure of founding members: There must be a clear description in the startup agreement regarding the death, disability, bankruptcy, or dismissal of a founder. The section must provide an option for the remaining members to buy out the member’s interest. If the startup agreement includes buyout rights, there must be an overview of the process, including the buyout value and payment terms. If there is no buyout price, it is best to consider a value early on or indicate a provision that considers the market value at the time of payout and assign a third-party appraiser.Dissolution and termination: The startup agreement must indicate and outline the situations or circumstances that can lead to the possibility of dissolution or termination of the business. The section must also include the processes and procedures and the waterfall distribution of assets if the company goes through the dissolution.Dispute resolutions: This section of the startup agreement discusses the procedure for handling and resolving disputes regarding the document. In most cases, founders agree that disputes that arise must go through binding arbitrations for resolution. However, if the founder and co-founders of the company do not agree with binding arbitrations, they can settle for other resolution procedures.
How To Write a Startup Agreement
The entire process of writing a startup agreement is different for various companies. The procedure for creating the document is dependent on the size, scope, and scale of the organization. Despite the stark differences between one company from another, there are still common denominators when it comes to developing the startup agreement. The section below guides you through writing a startup agreement for your startup company.
1. Decide if a Co-Founder Relationship Is the Best Option For the Company
Before writing the document, proceed with an initial meeting to align with partners. Discuss the company goals, expectations, culture, values, and work structure. One of the most common disputes that arise stems from discussions of forming partnerships or LLCs. While it is impossible to find a set of individuals that share similar opinions at a hundred percent, your co-founders need to be on the same page in the most common areas of the agreement.
2. Establish the Roles and Responsibilities of Each Individual
Many startups begin with two or three people doing multiple tasks and activities. If you are the most prominent figure in the group, they can assign the tasks they need to do. It is necessary to negotiate each role and responsibility before setting anything permanently. For a company, there must be a chief executive officer (CEO), chief operating officer (COO), chief financial officer (CFO), chief marketing officer (CMO), and chief technology officer (CTO). If there are only two individuals, the priority is the CEO and CTO. The number of officers depends on the number of individuals present in the company.
3. Produce Essential Legal Decisions
One of the most typical fallouts of startups involves legal mistakes. It is necessary to familiarize yourself with general legal issues that startup companies face and the possible procedures for handling these situations. The matters that you need to look into include intellectual property rights, vesting schedules for share insurances, founder departure solutions, management of daily operations, understanding basic legal terminology, and making decisions according to corporate bylaws.
4. Establish the Equity Compensation Management
There must also be a clear discussion about the co-founders settling equities among each other. It is necessary to discuss this thoroughly with all co-founders since assuming that everyone wants a fair share of the fair market value (FMV) is not always reasonable for each person. It is best to settle equity compensation through contributions, resources, and talents.
5. Set Up Meetings with a Startup Lawyer
After completing the basics of the startup agreement, set up a meeting with a startup attorney and the rest of the team members. Through this initial meeting, you can discuss and learn about the unique dynamics and objectives of the agreement and transfer them into a valid and enforceable document.
6. Review the Draft and Let the Founders Sign and Date the Agreement
After the meeting, you can draft a first copy of the agreement for the startup lawyer. Review the document separately and together, taking note of the possible changes that the document needs, and ask the lawyer to make the necessary revisions before allowing the signing of the agreement. After settling the modifications, allow all the founders to sign the document. Don’t forget to indicate the signing date.
What is the purpose of a founder’s agreement?
There are different reasons for creating a founder’s agreement for a startup business. For one, it establishes a sense of ownership when it comes to the roles and responsibilities of founders. It also offers necessary guidelines for handling disputes, provides provisions for terminating the contract, supplies the procedures for dissolution, and solidifies the idea of operating a business.
What are the four types of businesses?
The four major types of businesses present include sole proprietorships, partnerships, corporations, and LLCs.
What are the essential legal documents you need for a startup business?
Constructing a startup agreement requires multiple steps that need an expert’s guidance. Since the document tackles different issues regarding finances, intellectual property, fair market values, and roles and responsibilities, the founders must find a way to effectively negotiate with each other to agree on certain provisions to operate the company smoothly. Ensure that there is a startup lawyer to help the founders along the way. Familiarize yourself with a startup agreement by downloading the 16+ SAMPLE Startup Agreement in PDF, available in the article. Get yours today, only at Sample.net.