SHEPHERD AND WEDDERBURN START TO SCALE HUB
Founders' Agreement: explanatory note of key terms
This note sets out a summary of some of the key terms contained in the Founders' Agreement.
Before we look at the provisions in more detail, it's
important to note that, as with all the templates available
on the Start-up Hub, the Founders' Agreement will be
generated on a self-service basis, without our
involvement, and this note is simply to help you decide
whether the Founders' Agreement may be suitable for
your needs and circumstances. This overview is a
broad summary of the contents of some of the
provisions of the Founders' Agreement and does
not constitute legal advice.
It's also worth bearing in mind that the interests of each
of the founders may conflict in relation to the provisions
set out in the Founders' Agreement and you should
consider whether you, or any of the other founders, or
the company itself, should seek independent legal
advice before entering into the Founders' Agreement.
It may also be the case that you need to amend the
Founders' Agreement to cover certain issues or
requirements. If that is the case, we may be able to help
you. Please contact starttoscale@shepwedd.com and
a member of the team will be in touch to discuss your
requirements. Please note that we may charge a fee for
the provision of any advice and be required to on-board
you as a client in order to assist you. We will of course
first agree any fee with you, so please get in touch to
see how we may be able to help you.
What is a Founders' Agreement?
A Founders' Agreement (also known as a shareholders'
agreement) is entered into between the founders
(shareholders) of a company and the company itself.
Typically, a Founders' Agreement is entered into when
the company is formed (or shortly after) and remains in
place until the company receives seed or series A equity
funding. At that point, a new shareholders' agreement
will be put in place between the company, the founders
and the new investors
Why should I have a Founders' Agreement?
It is important to have a Founders' Agreement. A
Founders' Agreement will cover both the day-to-day
operation and management of the company as well as
fundamental issues like the procedure to follow if one of
the founder's wants to transfer their shareholding in the
company in the future
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What about the articles of association for the company?
This Founders' Agreement is drafted on the assumption
that the company has, or will, adopt the Model Articles
for a private limited company (as set out in schedule 1
to The Companies (Model Articles) Regulations 2008, a
copy of which can be found here).
association and the Founders' Agreement do conflict,
the terms of the Founders' Agreement will take
precedence. Whilst this is a saving provision in the
event of a conflict, it's better not to have to rely on this
and both documents should be aligned.
If that is not the case, the company's articles of
association should be reviewed to ensure that they do
not conflict with the provisions in the Founders'
Agreement. The Founders' Agreement contains a
clause (clause 1.9) which provides that, if the articles of
Whilst the articles of association are filed at Companies
House (and is therefore a publicly available document)
the Founders' Agreement does not usually need to be
filed at Companies House and remains a private
document between the parties to it.
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What assumptions have been made in creating the Founders' Agreement?
The interview for the Founders' Agreement on the Start-up Hub is designed to be quick and easy to complete. We have
therefore made a number of drafting assumptions in relation to the Founders' Agreement to reduce the number of
questions we need to ask.
If any of these drafting assumptions do not match your own requirements, the Founders' Agreement may not be
appropriate for you, or may need to be amended to suit your circumstances before it can be signed.
If that is the case, we may be able to help you. Please email the starttoscale@shepwedd.com and a member of the
team will be in touch.
Drafting assumptions
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The company is a private company limited by shares incorporated in the United Kingdom.
This is the first Founders' Agreement (or shareholders' agreement) being put in place between the founders in
relation to the company.
Each founder (shareholder) holds ordinary shares in the company (which is the only class of shares in issue).
The parties to the Founders' Agreement are the founders and the company. The company has not yet received
an investment in return for equity in the company.
Each founder is an individual and no shares in the company are held by an entity.
Certain matters can be decided with the consent of a Shareholder Majority. The Shareholder Majority is defined
in the Founders' Agreement as those shareholders holding (individually or together) at least 75% of the voting
rights in the company.
Key terms in the Founders' Agreement
Clause
Parties to the Founders'
Agreement
Overview
Each shareholder in the company should be a party to the Founders' Agreement. The
company should also be a party to the Founders' Agreement.
Clause 2: Business of
the company
The business of the company will be defined in the Founders' Agreement.
The interview will ask you to provide a summary of the business of the company. It is
important that this is an accurate description as this will, for example, help to determine
the scope of the non-compete restrictions (see Clause 8: Shareholders' restrictive
covenants in this note below). In addition, certain changes to the operation of the
business will require the written consent of a Shareholder Majority (see the Drafting
assumptions in this note above).
Each founder will covenant to promote and develop the business, to implement the
terms of the Founders' Agreement and, in broad terms, to not obstruct or delay any
action, decision or consent required by the Founders' Agreement.
Clause 3: Intellectual
property rights belong
to the company
It is important that the company owns the intellectual property developed in the
business. This clause provides that all intellectual property rights created or developed
by any person working for the company in its business (including any founder) will
belong to the company. To this end, the parties agree to do anything necessary to
perfect the company's title to those intellectual property rights.
Clause 4: Board of
directors
This clause will limit the number of directors that can be appointed to the board at any
given time (unless approved by a Shareholder Majority). The interview will ask you to
set the upper limit of the number of directors to include here.
The quorum for any board meeting will be at least two directors (unless approved by a
Shareholder Majority).
If a quorum is not present at the time of a board meeting, in broad terms, the meeting
will be adjourned, and the directors present at that adjourned meeting will then form a
quorum.
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The interview will ask you to confirm the minimum percentage of the issued share capital
that a shareholder must hold to be entitled to appoint a director to the board (or to be
appointed themselves as a director, which is often the case).
The interview will also ask you to confirm each of the directors of the company as at the
date that the Founders' Agreement will be signed.
All material decisions relating to the business should be made at a board meeting (or
by using the alternative directors' written resolution procedure).
Clause 5: Matters
requiring the consent of
a Shareholder Majority
Schedule 2 to the Founders' Agreement contains a list of matters that cannot be
effected, or proposed by the company, without the prior written consent of the
Shareholder Majority. This provides protection to the founders as those matters cannot
be effected without the consent of a Shareholder Majority. In other words, a founder
acting alone (unless they hold at least 75% of the issued share capital, which would be
unusual) cannot implement any of these matters.
The matters listed in Schedule 2 to the Founders' Agreement are outside the ordinary
course of business (and are not, for example, day-to-day operational matters).
Clause 6: Share
transfers (general)
Clause 7: Leaver
Transfer Notices
The Founders' Agreement restricts the transfer of shares by a founder to the following
four circumstances:
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a transfer to a so-called Permitted Transferree (for example, certain close
family members of the shareholder);
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a transfer after the pre-emption provisions contained in the Founders'
Agreement have been followed (broadly, any founder who wishes to transfer
some (or all) of their shares to a third party purchaser (and not to a Permitted
Transferree), must first offer those shares to the current founders to acquire in
accordance with the pre-emption provisions). These are sometimes referred to
as "rights of first refusal" and allow the remaining founders to acquire existing
shares in the company before they are sold to a third party.
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a transfer by a founder who is a Leaver (see Clause 7 (Leaver Transfer
Notices in this note below); and
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a transfer made with the prior written consent of a Shareholder Majority.
In the event that an employee, consultant or director of the company leaves the
company for any reason, their shares will be sold, for their agreed (or determined)
market value, to one of the following (in this order of priority):
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another person nominated by the directors and approved by the Shareholder
Majority (which could, for example, be a new employee employed by the
company to replace the departing member of the team);
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to the trustees of any employee benefit trust; or
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to the company itself (if the company is lawfully able to buyback those shares
at the relevant time).
The departing shareholder (known as a Leaver) will not be able to vote or receive notice
of any general meeting of the company in respect of any shares held by them until those
shares are sold.
If a Leaver has transferred shares to a Permitted Transferree (please see Clause 6
(Share transfers (general) in this note above), then those shares will be subject to the
same compulsory transfer leaver mechanism.
Clause 8: Shareholders'
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If a founder no longer holds any shares in the company, they will be subject to a number
restrictive covenants
of restrictions to prevent them from, for example, starting a company in direct
competition with the business of the company in the same geographical area or from
enticing certain employees away from the business. The aim of these restrictions is to
give the company a short window of time to focus on growing its business without any
disruption, or direct competition, from a departing founder.
Some of the restrictions on a departing founder will last indefinitely including using the
name of the company or logo in a business that is competitive with the company or to
do, or say, anything which is intended to damage the goodwill or reputation of the
company.
Clause 9: Deed of
Adherence
If shares in the company are acquired by a person who is not already a party the
Founders' Agreement, that person must sign a Deed of Adherence which, in broad
terms, provides that that person is party to the Founders' Agreement and agrees to be
bound by its terms.
A form of Deed of Adherence is set out in Schedule 3 to the Founders' Agreement. Each
time there is a new shareholder, a new Deed of Adherence should be entered into
between the company, the existing shareholders and the new shareholder.
The Founders' Agreement provides that the company can act as power of attorney for
the existing shareholders for the purposes of signing the Deed of Adherence, which
should help with the signing process.
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