Is It Mandatory to Register a Founders’ Agreement in India?

 What is a Founders’ Agreement?

You might want to run a business, start a firm, or begin a startup, right? But this startup of yours might “end up” before it even starts if you don’t have a founders’ agreement. That is where lawyers come to the rescue in case of a misunderstanding. They’ll aid in the drafting of such an agreement and work out any disputes as well. But what is this agreement all about?

Whenever someone starts a business, startup, firm etc., all the people involved, outline their rights, obligations, etc. and instead of an oral proof, which is difficult to prove in the court of law, its better to have a proof that is properly signed and stated, and this written document is referred to as a founders agreement. The main reason why this agreement, which specifies the roles and responsibilities, is needed so as to prevent any business-related disputes that might happen in the future.

It’s a must to have a founders’ agreement in writing. It must be signed by 2 or more Co-founders at the time when a new business is started.

 What it includes:

The founders’ agreement generally includes all the responsibilities and work of the founders. It sometimes also includes information about how the equity will be split among the founders of a business or startup. It includes the information and rules about the intellectual property assets, specifying things like the Intellectual property will belong to the whole unit, and not just a person. It will also include details of how such intellectual property will be managed and even sold, along with details about non-compete clauses and confidentiality agreements.

Apart from that, it’ll include things like business strategy, salaries, appointment and removal of employees, etc.

Is it Mandatory:

So, is it mandatory to sign such an agreement for a business, firm, etc.? The simple answer is “No”. But is it necessary to prevent future problems and legal disputes? The answer is “Yes”.

So, someone starting a company, etc., must have a founders’ agreement to prevent legal hassle in case disputes arise in the future. It will work as a guiding document for the business for its long-term functioning.

Sometimes, while raising funds for the business as well, the investors make it mandatory to present such a document so as to know about the business, about what they are investing in.

Qualities of a good Founders’ Agreement:

So, now we’ll discuss the qualities of such an agreement to make things clearer and understand it better. Along with the qualities, we’ll also talk about its main provisions as well, starting with,

Business Type:

It will always state the type of business that the founders are going to set up and specify its nature as well. It will state whether the business is a Partnership, Corporation, Limited Liability Company, etc.

Division of Equity:

It will also include details of how the equity is going to be divided among the founders, and this will prevent any misunderstandings from happening in the future. For example, there might be businesses with differences in the investment capital by the founders, where some founders believe the equity split is the same for everyone, and others believe it to be according to the capital invested. So, to prevent any sort of confusion like this, which might cause conflicts, this is clearly stated in a founder’s agreement.

Powers and Dispute Resolution:

The powers of people will be framed and mentioned. The power of decision making will be conferred upon people, and how such powers are to be used. It might also include the provision of voting in case a dispute arises.

It will also include details on how any disputes in the company will be settled. Whether there will be a separate board set up for resolving company disputes, or the disputes will be referred to arbitration or mediation, etc., will be stated in the agreement.

Intellectual Property:

Intellectual Property is one of the most important things which is needed in running a business. Whether it’s a business for digital services or physical goods, etc., all require some form of logo or name that needs to be registered to prevent its misuse and make it of a distinctive nature from similar goods or services. Even the logo and name of the company, business, etc. is an Intellectual Property only.

The founders’ agreement will specify various things about it, such as:

• Þ While any Intellectual Property is made by an employee during the employment period, it will belong to the business as a whole and will prevent such business property from misuse.

• Þ How will this Intellectual Property be managed? Who will have the power to alter it? How will the money be allocated if it’s sold? All these will be answered in the agreement.

• Þ It will include information about confidentiality as well. Suppose you’re a company and you’re about to launch a product named “X” on a particular date. You have registered it, but haven’t created its hype by marketing it and putting it in the minds of the public. So, to prevent any leaks of information about the product, the founders’ agreement may also include information about keeping secrecy in such scenarios.

Remuneration (Pay):

All the information about the salary for the work of employees, partners, heads, etc., will be clearly stated in the agreement. It will also state the basic salary, any sort of allowances that will be given to the employees, etc. Information about how this salary will be increased or decreased in case of better or worse performance will also be included, which will be based on the performance of the employees on a day-to-day basis.

Removal:

And lastly, it will also include the process for the removal and termination of co-founders, employees, etc. This might be because of consistent underperformance, which will be clearly stated in such an agreement.

In conclusion, So, to conclude, we can say that, while it’s not legally mandatory to make a founders’ agreement in India, it’s really very important to have one in writing, and the same might also be needed in funding rounds. Also, even though it’s usually signed privately, the founders may get it notarized or registered to give it more legal strength. In short, having such an agreement is one of the smartest moves that a founder can make while starting a business.