When two or more entrepreneurs envision launching a new business together, the focus typically remains on the exciting growth of the startup and its eventual success. While a healthy dose of optimism is important when starting a new business (without it, entrepreneurs would likely talk themselves out of ever taking any risk), it’s also essential to anticipate and plan for potential issues or obstacles that may arise in the weeks, months, and years following the launch of the new business venture. One of the strongest protections that startups can use is called a founders’ agreement. This document clearly defines the roles, responsibilities, and expectations of each co-founder, or partner, to minimize confusion and prevent potential disputes from arising later on. Although there are several free online templates for entrepreneurs to use in order to create a founders’ agreement, these generic templates usually fail to sufficiently protect the best interests of the founders / partners and the business itself—leading to contentious disputes over the vague and unclear terms.
The most effective way to protect the future of your new business is to work with a highly experienced and dedicated Alabama and Texas startup attorney who can help you identify the specific needs and goals of your venture and create clear and comprehensive legal documents that define the roles and responsibilities of each co-founder. Your business formation lawyer can help you put startup legal documents for Texas businesses in place so that you can run your business with greater ease and confidence. This post will explore the importance of founders’ agreements for Texas startups and what to include in a startup partnership agreement to sufficiently protect the success of the startup.
Key Provisions Every Founders’ Agreement Should Include
It’s important to recognize that founders’ agreements can be customized to suit the specific needs and goals of the startup. However, there are certain provisions that every founders’ agreement should include to fully protect the best interests of the co-founders and the startup itself. Below are some of the topics to address in the co-founder legal agreement your startup puts in place.
Equity Ownership and Vesting Schedules
Taking the time to clearly define and document a fair equity split for Texas startups can significantly reduce confusion and arguments later on. As you draft the founders’ agreement, be sure to outline the percentage of ownership for each co-founder / partner and establish a vesting schedule that allows the founders to earn their shares over time.
Co-Founder Roles and Responsibilities
The more details you can include that define the roles and responsibilities of each founder, the more direction and clarity your startup will have as it grows. Include entails like the specific tasks, duties, titles, and time commitments of each co-founder. You should also address compensation considerations, such as how salaries or distributions will be handled and dispersed among the founders.
Decision-Making and Voting Rights
Every startup will face decisions as it operates and expands. You can use the founders’ agreement to define the decision-making process that will be followed (i.e., majority vs. unanimous vote), highlight who has the authority to sign contracts, and bestow voting rights as your startup sees fit.
Intellectual Property
Some of the most contentious business disputes arise because of intellectual property (IP) issues. When you use your founders’ agreement to explicitly state that all intellectual property created by any founder (such as visual designs, branding logos, code, etc.) belongs to the company and not the individualist, your new business can avoid costly disputes over IP ownership later on.
Exit Terms and Buyouts
When a founder needs to leave the company, the founders’ agreement will serve as a valuable guide in how to navigate this transition as smoothly as possible. Include clear guidelines to specify what happens when a founder leaves, quits, or is terminated from the company (i.e., buy-back provisions, non-disclosure, non-compete, and confidentiality agreements, etc.).
Legal Considerations Specific to Texas Startups
Many startups include non-compete agreements to protect the integrity and success of a business in the event that a co-founder leaves the company. In Texas, non-compete agreements are enforceable under specific conditions. First, they must be reasonable in time frame (i.e., durations of one or two years is generally considered fair, while excessive lengths like five or more years may be considered invalid). Next, an enforceable non-compete agreement must be limited in its geographic scope, which means that the terms generally apply only to the areas where the founder or employee actually worked or where the company operates the business. Non-compete agreements must also be limited to the specific business activities performed for the startup company. Finally, a valid and enforceable non-compete agreement in Texas must protect a legitimate business interest. In other words, an overly vague non-compete agreement that is only in place to prohibit competition will probably not be legally enforceable. To learn more about the business formation process in Texas reach out to a knowledgeable and trusted startup attorney today.
When Should a Texas Startup Create a Founders’ Agreement?
The ideal time to draft and establish a founders’ agreement is before incorporation or during the seed funding state. As you lay the groundwork for a successful startup, you can negotiate the terms of the founders’ agreement so that all parties involved in launching the business fully understand their roles and responsibilities moving forward.
FAQs About Founders’ Agreements For Texas Startups
Can We Use a Founders’ Agreement If We’re an LLC?
Yes, LLCs in Texas can benefit strongly from putting a well-drafted founders’ agreement in place. Drafting a founders’ agreement can make the process of formally adopting an LLC operating agreement that much easier.
Do We Need a Founders’ Agreement If We Are Friends and Family Starting a Business Together?
Absolutely. Even though you may not picture a time when confusion or disagreements may arise, putting a founders’ agreement together before you launch the startup will protect your best interests and minimize costly disputes later on.
Reach Out to a Top Texas Business Formation Law Firm Today
At Sewell Sewell Beard LLC, we believe in working alongside every client we serve to identify their unique needs and concerns so that we can deploy customized solutions to help them achieve their goals. If you have questions about launching a startup as strategically and successfully as possible, please contact our Prosper, Texas office at (972) 777-5390 or our Jasper, Alabama office at (205) 544-2350 today to get started with a highly experienced and knowledgeable business formation attorney.