Importance of a Founder’s Agreement in the United Kingdom

3E Accounting discusses the merits and importance of a Founder’s Agreement in the United Kingdom.

A founder’s agreement is, as its name implies, a contract between the founders of a company. A founder is a person who started the company and is usually also the owner. Where there is more than one founder, it is prudent to safeguard the business relationship and align all interests. The importance of a Founder’s Agreement in the United Kingdom should never be underestimated. It is a fundamental step to ensuring a smooth transition from start-up to full-fledged entrepreneurship.


An Accord of Owners

Getting down to the basics of a brilliant business venture requires a lot of hard work. You and your co-founders need to consider a business plan, start-up capital, type of business structure, etc. In the heady rush of the initial days of planning and roll-out, it is easy to overlook a crucial requirement. While it is not mandatory, a Founder’s Agreement is a necessary document that all start-ups should have.

A Founder’s Agreement sets out the terms and obligations of each founder as well as their capital and equity contributions. It works to strengthen long-term commitment and goes a long way towards ensuring continuity.

In drafting the agreement, all issues can be addressed and set out clearly in writing. Everyone knows what their obligations are and what belongs to them. In this respect, it also clarifies intellectual property rights, which can be the subject of much contention later. A Founder’s Agreement ensures there is no ambiguity and promotes transparency amongst the parties,

It acts as vital insurance against the rise of disagreements and problems between founding members of the company. It can also pre-empt founders from abruptly pulling up stakes in the middle of a business’ start-up. This, in turn, will inspire confidence in potential investors and shareholders. Conversely, the agreement might also be the only evidence you have of your involvement in the business.

Hence, a well-drafted Founder’s Agreement should ideally address some of the following matters:

  • Co-founders names, roles, contributions, obligations, ownership structure, etc.
  • Description of the business, its activity, culture and ethics, the lock-in period for shares, etc.
  • Duration of the agreement, vesting schedules, termination or exit clauses, etc
  • Confidentiality, non-competing clause, etc.
  • Intellectual property rights, asset ownership, cash contribution, etc.

A Founder’s Agreement is versatile enough to carry over and convert into a shareholder’s agreement once the company has been incorporated. Where a founder declines to be a shareholder, then an ancillary or service contract can be drafted instead.

Acknowledging the importance of a Founder’s Agreement in the United Kingdom is the first step in protecting your interests. Drafting the agreement itself can be done easily as there are many free resources online. However, since it is a legally binding agreement, it is always best to let the professionals handle it. 3E Accounting provides impeccable service for all your business needs. From drafting agreements to company formation and audits, our network of specialists offers customisable solutions to suit your requirements. Contact 3E Accounting for best-in-class results and innovative solutions.