3 Essential Facts About Founders’ Agreements

3 Essential Facts About Founders’ Agreements

If you are interested in forming an LLC or a corporation, you probably already know that you need to file documentation with the state, install an operating agreement or bylaws, and decide how to sell shares. But you may not know about a missing puzzle piece—the founders’ agreement. This is an essential document that will secure the health and well-being of your business and prevent many owner disputes.

Here are three things you need to know about a founders’ agreement:

1. It’s Not the Same as an Operating Agreement or Bylaws

A founders’ agreement, also known as a shareholders’ agreement, sets out the roles and responsibilities of owners, the mechanisms for settling key decisions, and restrictions on transferring ownership of shares.

Both LLCs and corporations use founders’ agreements alongside their operating agreements and bylaws. Operating agreements and bylaws lay out how a company will operate itself, covering topics like notice, meetings, voting procedures, and the duties of directors. On the other hand, founders’ agreements govern the rights and obligations of those who own the company and run it behind the scenes.

Thus, if the operating agreement or bylaws gives a company its public personality, the founders’ agreement helps maintain the relationships that anchor it.

2. It’s Not Legally Required, But Your Business Needs One

It’s easy to assume that you may not need a founders’ agreement, especially because you chose your co-owners or shareholders carefully. Additionally, while founders’ agreements aren’t legally required, you’d be hard-pressed to find a successful LLC or corporation without one. However, you may not always agree with your shareholders. Interests can change. Alliances can shift. Thus, a founders’ agreement protects everyone, including the company.

Much like a prenup, a founders’ agreement sets the rules before the game starts because it’s easier to ensure balanced owner relationships before problems arise. It sets out everyone’s rights and obligations and limits every owner’s ability to act in a way that harms the company or the equity of other owners.

3. It’s Not Just for the Original Founders of the Company

The name “founders’ agreement” is a bit of a misnomer, as the agreement is not restricted to the original owners of an LLC or corporation. The founders’ agreement governs every owner of your business, and for good reason.

Every owner, regardless of how much she owns and when she acquired it, enjoys ownership and management rights. With so much at stake, the founders’ agreement is an invaluable tool, placing preconditions for participating in your business from the jump. By placing particular limitations on all owners, regardless of original status, a founders’ agreement empowers the current owners to protect their equity and the management of the company. 

For your LLC or corporation, an attorney is immensely helpful in drafting your founders’ agreement. She can identify issues you may not be familiar with, such as an out-of-state owner or a 50%/50% split vote. She can walk you through hypothetical scenarios, so you can decide how to handle them before they become problems.

Additionally, an attorney can update the agreement. Companies evolve, and circumstances change—the protection of your company depends on your founders’ agreement adapting to new challenges, be it amending roles or transferability rules.  

What’s your experience with founders’ agreements?  Have you ever been in a founder’s dispute? Make sure that you have a unified team of owners behind your LLC or corporation. Contact us to learn more about developing a solid founder’s agreement.

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