Many startups begin with a few friends and an idea. It’s easy to think that you’ll be able to work together to overcome any problems you may face in the future. However, as a startup grows, so do its potential problems. An equity and founder agreement might not prevent every possible issue, but it can help you navigate problems as they arise. Here’s a look at creating equity agreement startups in Houston.
Your equity and founder agreement should be tailored to your individual company. An attorney can work with you to create an agreement that suits your needs.
What Are Equity and Founder Agreements?
An equity and founder agreement is a legally binding contract that founders enter into when they start a new company. The agreement defines each founder’s roles and responsibilities and offers a roadmap for handling situations like disputes or the departure of one founder.
There is no standard template for equity and founder agreements. However, many agreements include the following:
- The percentage of equity each founder has in the company
- The vesting schedule for each founder’s equity
- Each founder’s roles and responsibilities
- The decision-making authority each founder has
- Whether intellectual property will be owned by the company or individual founders
- How equity will be redistributed if one founder leaves
- How the founders will resolve disputes.
An equity and founder agreement for a startup is a lot like a prenuptial agreement for a couple. You might think having one is unnecessary at this point, but having a clear agreement will make dealing with disputes much easier.
Why Do You Need a Founder Agreement?
It’s easy to overlook the importance of founder agreements. Houston’s thriving business landscape creates an exciting environment for new startups. It’s possible to get so preoccupied with the ins and outs of getting your startup off the ground that you neglect this critical step. However, an equity and founder agreement is indispensable for several reasons.
It Simplifies Conflict Resolution
You and your co-founders may all be in agreement right now. But what happens in the event of a business dispute? Because a good founder’s agreement establishes procedures for resolving disagreements, it can serve as a valuable guide when there’s conflict between founders.
It Helps Protect Intellectual Property
Intellectual property law is notoriously complex, and litigation can be drawn out and expensive. When your founder agreement clarifies whether intellectual property belongs to the company or individual founders, it may save you from a lengthy court battle.
It’s a Good Sign to Investors
By itself, an equity and founder agreement isn’t going to draw investors to your company. However, investors want to make sure they put their money into companies with long-term potential. A founder agreement shows that you have a clear understanding of what running a company entails — and you’re prepared to handle any number of difficult future scenarios.
It Makes Your Company Sustainable in the Long Run
You may have a clear idea of your plans for your company, but those plans can change. Founders may leave, and shifts in the business landscape might push your business in a new direction. To be sustainable, a business must be able to quickly adapt to change, and a strong equity and founder agreement can help it do that.
What Should You Include in Your Equity and Founder Agreement?
The exact provisions to include in your agreement will depend on your industry, your company’s structure, and other factors. However, when you’re creating an equity and founder agreement, it’s generally a good idea to include certain details.
Your Company’s Ownership Structure
This is where you outline how much equity each founder has in your company. It should also clarify whether each cofounder’s ownership share is contingent on their having a management role — or if they are owners strictly in the economic sense.
Are you drafting a founder agreement? Call The Weisblatt Law Firm, PLLC at (713) 666-1981 to request a free phone consultation.
Each Founder’s Roles and Responsibilities
When you first create a company, it’s easy to throw around titles. However, to avoid confusion, you should outline the responsibilities that come with each role. As your business grows, it can be difficult to decide who will take on new responsibilities. When you have an agreement in place, it gives you something you can quickly refer back to.
How Decisions Will Be Made
This is an extremely important part of your agreement. You should clearly outline who has voting and veto rights on company decisions. Is there someone who has ultimate decision-making authority or veto power? Do some founders not have voting rights at all?
How You’ll Handle Intellectual Property
Your company’s intellectual property is what makes it unique. In most cases, each founder contributes to the business’s intellectual property. If a founder leaves, does the company retain ownership of the intellectual property they contributed? Or does it revert back to the founder? If a given piece of intellectual property is sold, how are proceeds distributed?
Depending on the nature of your company, this section can be very complicated. A business lawyer can help you clearly outline how you’ll handle various potential scenarios.
What Happens When a Founder Leaves
If one of the founders wants to leave the company (or if they’re removed by the other founders), how will you buy out and redistribute their shares? Outlining procedures now will make it easier to handle unexpected departures in the future.
How You’ll Handle Disputes
No matter how thorough your founder agreement is, there’s still a chance that you’ll have a dispute over something contained in the agreement. You might be able to resolve your disagreement with a conversation — but in case you can’t, it’s a good idea to have a procedure for resolving disputes.
Often, startups specify that disputes must be resolved by binding arbitration because arbitration tends to be faster and less costly than litigation.
Should You Work With a Lawyer to Create Your Agreement?
A Business Lawyer Can Help You Avoid Future Issues
Some new business owners decide that their best course of action is to use an online founder agreement template. This is not a good idea. To be effective, an equity and founder agreement must be designed specifically for your company.
Business lawyers have years of experience drafting contracts — including founder agreements — for different types of businesses. A lawyer can identify problems that often impact companies in your sector and create contract provisions to address them.
You’ve invested time and money into your startup, and protecting that investment is of paramount importance. An equity and founder agreement is one of the most effective ways to protect that investment, especially in your company’s early stages.
The Right Houston Business Lawyer Makes a Difference
The Weisblatt Law Firm, PLLC Is Here for You
You wouldn’t create a startup with just anyone. Likewise, when you’re choosing a lawyer to create your equity and founder agreement, you shouldn’t just choose the first attorney you find. Andrew Weisblatt has been practicing business law since 1992, and he takes pride in forming lasting relationships with his clients. Whether you have a quick question or are looking for a long-term legal advisor, he’s here to support your startup.
Need help crafting your equity and founder agreement? Call The Weisblatt Law Firm, PLLC at (713) 666-1981 for a free phone consultation.
Attorney Andrew Weisblatt
Mr. Weisblatt has practiced continuously since becoming licensed in 1992 and has represented businesses ranging in size from one person start-up ventures to multi-national corporations employing hundreds of people in multiple countries. From 2005 through 2009 Mr. Weisblatt was in-house counsel and chief operating officer of a multi-national corporation in the steel products industry. That in-house position provided valuable insight into how businesses work and what they actually need from their lawyers – both in-house and outside counsel. Attorney Bio
