Avoiding legal pain in startups

We are continuing to describe how to make a proper Founders agreement using, as an example, agreement that we’ve prepared and signed in Staply. If you just joined us, this is a series of articles for startup founders, who wish to implement a basic legal protection for their startup. I know very few startups, that had any legal protection, especially on the initial stages of the company. If you don’t want to do any kind of legal activities without a lawyer, these articles can be used as a prep material for the discussion with a lawyer or attorney.

In the previous parts of the Founders Agreement line-by-line guide I’ve described preamble part and started to describe the agreement part. I’ve already covered topics related to responsibilities of the CEO (Chief Executive Officer), COO (Chief Operating Officer), making amendments to the agreement and intellectual property.

In this article I’ll tell you how to make a reference to another agreement, I’ll also tell you about founders commitment, term and termination.

Reference to Another Agreement #

References to other agreements, that were signed in the past or will be signed in the future, are quite useful. It helps to link documents between each other or to make an obligation to sign a document in the future that will also be linked to the current agreement.

In our Founders agreement I made a reference to the Vesting and Stocks agreement, that should be signed after execution of the Founders agreement. Stocks distribution and Vesting rules are are really important and should be discussed before founders start working on a new project. In Staply we’ve already signed this agreement and I’ll share it with you in one of the next articles

In Staply Founders agreement we’ve made a reference in the following way:

“6. Founder’s stock and vesting. The Founders agree to sign additional agreement, where terms and conditions of the stock distribution, purchasing, cancellation and vesting are set.”

I believe it is quite understandable. The only part I want to you to pay your attention to is:
“…of the stock distribution, purchasing, cancellation and vesting are set.”

Briefly, what does it mean:
“Distribution” of the shares means how much shares will be distributed to each founder and investor.

“Purchasing” of the shares means the procedure of how a person or new investor can buy shares of the company.

“Cancellation” of the shares means a set of rules, that describe how founder or investor can lose the shares.

“Vesting” of the shares means a set of rules, that describe how founders get their shares.

If we just write that we need to sign “Stocks and Vesting” agreement, every document with this title will comply with the obligation. That is why i’ve added several topics, that should be covered in this agreement: “…distribution, purchasing, cancellation and vesting…”. Now “Stocks and Vesting” agreement should at least have terms and conditions focused on shares distribution, purchasing, cancellation and rules of vesting. Be sure to check this clause before signing or creating your own Founders Agreement.

Founders Commitment #

This paragraph sets rules for founders regarding their commitment to work, i.e. how much time do all founders need to work on a new project. This paragraph is optional and depends on the level of trust in your country. If you really trust your partners, then you can consider deleting this clause. If you leave this paragraph and one of the founders does not work, for example, at least 40 hours per week, then you’ll have legal grounds to terminate the founders agreement and fire the founder, who doesn’t perform well.

In our Founders Agreement we have the following clause, related to Founders Commitment:

“7. Founders Commitment. Each Founder agrees to spend at least 40 (forty) hours per week to work on Staply.”

There are two customizable parts here and a lot of additional options, that you can consider. The first thing you can change is the amount of hours, that you want founders to spend on the project. In our agreement we’ve set quite a standard amount of time.

Also, please pay your attention to the phrase “Each Founder”, which means that the current requirement applies to all Founders without exceptions.

The Second customizable part refers to the additional requirements, that you want to apply to Founders commitment: amount of time to code, to call new clients, to meet with clients, to test the software, etc. It’s completely up to you what to put here. I suggest not to add it here, but to create a KPI’s for each of the founders - be sure that they are made in accordance with the SMART principles.

Term and Termination #

This is a really important part of the agreement. Almost in all agreements you’ll find such a clause. It’s very important to discuss and agree with all founders on the procedure of the agreement termination. In our agreement we have a procedure, that founder needs to comply if he decides to quit Staply. Also, we have a procedure to fire a founder if he starts to violate the terms and conditions of the present agreement. Take a look:

“8. Term and Termination of the present Agreement. The Founder, who is willing to stop working on Staply or in Staply Company should send a notification to the other Founder before 30 (thirty) calendar days of the termination date.”

According to our, accepted by all the founders, procedure, if one of the founders decides to leave a company, he need to send a prior notification before leaving. It means, that after the founder sends the notification he need to continue to work fully in accordance with the Founders agreement for 30 calendar days. If he won’t do that, this can be a subject for a lawsuit.

Also, it’s important to mention the type of days, that will be counted from the date of notification sending. There can be calendar or working days. Calendar days are simple - they are counted in accordance with the calendar. Each day (even holidays and weekends) will be considered as a calendar day. Working day - is the day when person need to go to the workplace. This doesn’t include holidays and weekends, because, typically, on these days people have no obligation to work. Typically in one calendar week there are 7 calendar days and 5 working days.

Condition, that can be used to fire a founder:

“If one of the Founders fails to comply with the terms and conditions set out in this Agreement, other Founder may fire such Founder from the Staply or Staply Company by sending a notification to him within 30 (thirty) calendar days after the date, when such breach or violation of the present agreement was discovered.”

Very simple requirement. If you don’t comply with any terms and conditions of the Founders Agreement, any founder can fire you from the project by sending a prior notification, when the breach of the agreement was discovered.

It’s quite useful and universal phrase, that you can use on the initial stage of the startup. However, here are some pandora-box things, that are built-in to this phrase. If notification wasn’t sent to the founder, who breached the agreement, then it will be considered, that he doesn’t violate any terms or conditions of the Founders Agreement. And this argument can be used in court. If you want to avoid it, you can add something like that:

“…For the avoidance of doubt, if one of the Founders fails to comply with the terms and conditions and if other Founders don’t send a notification within reasonable amount of time, it will not be considered that the Founder comply with the terms and conditions of the Agreement…”.

Please mention in comments if you need a template of the notification letter.

Next Article #

Next article is the last article from the series of line-by-line guide to Founders Agreement. Please let me know, what else should I cover in my next articles.

Feel free to comment or to give feedback on our Subreddit.