The importance of Founder Agreements and IP transfer

When you are embarking on your first startup it is all too easy to miss some essential simple legal documentation beyond the usual company incorporation documents.

You want to get on and start building stuff as soon as possible right?

Not so fast.

If the company has more than one founder you should have some basic agreements which will protect you all in the long run and ensure a better chance of receiving funding at some point in the future.

I see all too frequently founders who do not create these simple documents, potentially causing a problem that can be big enough to sink the company.

The first is the Founder Agreement. You can usually download these documents from the web.*

A founder agreement basically aligns all founders so that everyone knows where they stand.

The agreement might cover topics like roles and responsibilities, equity share (sometimes based on what each person brings to the table), vesting program and how decisions are reached.

One of the most important topics is making sure that a founder cannot walk away with their equity fully vested too early (this can and does happen!).

Such an event would cause a problem raising any venture capital, as no investor wants a non-contributing founder walking around with a significant slice of the company.

All founder stock should vest within a certain time frame, usually up to four years.  If a founder puts money into a startup, it should not be subject to vesting.

The second important document is the IP transfer document. Sometimes this can be incorporated into a service (employment) contract but often co-founders do not give themselves service contracts when starting out only when institutional funding is raised.

In that case an IP transfer agreement will place any IP that any of the founders bring to the table into the custody of the company.

These simple and free to download documents could save founders a lot of trouble and heartache.

*As always with all legal matters you should consult your legal counsel for advice.