Imagine you and your friends are setting up a lemonade stand in bustling Accra, Ghana. The sun is high, the lemons are juicy, and everyone's excited to make a sale. But before you start shouting, "Cold lemonade here!" there's a crucial step: deciding how things will work together. Who squeezes the lemons? Who takes orders? Who handles the money? Most importantly, how will you share the profits (and maybe some spilled lemonade)?

This initial planning session is similar to creating a Founders Agreement for your startup. It is like laying the groundwork for your secret recipe for success. A Founders Agreement clarifies roles and responsibilities, how you will share profits and losses, what each person contributes (ideas, skills, resources, time), and what happens if someone decides to move on. These upfront discussions can prevent misunderstandings and disagreements down the road.  It is not just about what happens if things go wrong; it's about setting clear expectations from the beginning, even when things are going smoothly. 

Just like that lemonade stand, starting any venture in Africa is a thrilling journey with your passionate team. You are brimming with enthusiasm, much like the beginning of a great business idea, the same way you wouldn't open a lemonade stand without a plan, starting a business without a Founders Agreement can lead to trouble down the road. Similar to how you might hesitate to discuss a prenuptial agreement at the start of a romantic relationship, many African startup founders hesitate to create a Founder Agreement. After all, you're all in love with the idea, and legal documents might seem unnecessary or like a sign of distrust.

However, having funded over 100 startups across Africa, we have witnessed the importance of a well-drafted Founders Agreement. For instance, we had to help a promising FinTech startup in Lagos, Nigeria, resolve founder differences that almost caused their venture to crumble due to a lack of a Founders Agreement. Five co-founders, brimming with enthusiasm, launched their venture without outlining roles, responsibilities, or equity split. As the workload increased, tensions rose between those who shouldered the burden and those who weren't pulling their weight. Without a plan for addressing underperformance, the situation became untenable. The co-founders wasted precious time resolving issues that could have been predetermined, eventually going their separate ways and leaving their venture in ruins, leading to starting the business afresh.

So, while it might seem like a buzzkill to talk about legal agreements when you're busy dreaming up new ideas, creating a Founder Agreement is actually a smart and responsible move. It sets the stage for a successful and harmonious startup journey, ensuring that everyone can enjoy the adventure without worrying about what might go wrong between the founders or how to handle situations when things go right.

When Is the Right Time for a Founder Agreement?

There's no need to wait until your entire business plan is finalised or figured out. The key is to initiate discussions and draft an agreement once your team gels and your venture shows promise. This could be after you are convinced of the business idea and confirm everyone's commitment (including their time (which does not necessarily have to be full time), resources, networks etc) to suggest your startup has real potential.

Even if you haven't officially registered your business yet, you can draft a Founder Agreement before formal registration. The legalese can be tailored to cover the agreed-upon relationship after incorporation. This way, everyone is fully aligned and committed to what lies ahead.

1. Key Terms in a Founder Agreement and Why They Matter:
   • Roles and Responsibilities: Just like assigning tasks at your stand (squeezing lemons, handling money), a Founders Agreement defines each founder's role and contribution to the startup. As your startup grows and your needs change, your agreement can evolve. Amendments can be made through addendums, ensuring everyone remains aligned with the latest roles and responsibilities. The core agreement remains intact even when you bring new founders on board. New founders must simply sign an Annexure (attachment) to the existing template. This streamlined approach eliminates the need to completely rewrite the document, saving time and resources. Schedules and Annexures can be updated over time without affecting the main agreement itself. An addendum can be added to the agreement for more substantial changes. This legally binding document becomes an extension of the original agreement, reflecting the updated terms. Our sample annexure provides a helpful reference point for such situations. The key is to ensure all founders agree to any changes and that these changes are properly documented. However, in exceptional circumstances where one founder cannot sign, some agreements allow the revised documents to become binding upon a majority vote. This prevents any single founder from holding up progress. It is important to note that while we advocate for having all signatures on amendments, you can tailor your agreement to reflect your preference.
   • Performance Goals and Consequence of Non-Performance. Performance Goals are like targets or milestones each founder agrees to work towards. These goals could include launching a product by a certain date, reaching a specific number of customers, or achieving a revenue target within a given timeframe. Establishing consequences for non-performance ensures that founders take their commitments seriously. It emphasises the importance of meeting goals and fulfilling responsibilities within the startup. The clause helps promote fairness among founders, and the actions or inaction of others should not disadvantage those who consistently meet their goals. Also, we have seen scenarios where one of the founders needs to pursue other goals or needs to go on study leave and might need to take temporary leaves or work part-time due to unforeseen circumstances. Here's how to address this: (i) Vesting schedules can be paused, slowed down, or adjusted during such periods to ensure fairness among founders; (ii)  If a temporary replacement is necessary, you can consider splitting the initial founder's equity allocation proportionally with the replacement during their time filling the role. (iii) For founders consistently working part-time, a reduced monthly vesting allocation might be considered to reflect their ongoing contribution (iv) For extended absences that significantly impact the business, the agreement can outline a process for requesting the founder's termination or resignation. Vesting would typically cease in this scenario to protect the company's interests.
   • Capital Contribution:  This clause outlines what each founder contributes (cash, equipment, time, skills, expertise) to get things started. Most founders sometimes use the capital contributions to determine initial ownership stake and voting rights within the company. Contributions are not limited to cash,  and the agreement should reflect the value proposition of all contributions (both cash and non-cash) when allocating equity (ownership stake). Ownership is often earned over a set period (vesting schedule) to ensure founders remain committed and engaged in the venture's success. The clause will address how ongoing contributions (e.g., additional equipment, and continued technical work) might be factored into ownership after the initial capital contribution. There might be a limit on the value of in-kind contributions used towards ownership. We typically recommend a vesting schedule of 2-4 years. This means founders don't receive their full share of ownership immediately, but rather earn it over time. 
   • Ownership (Equity) Distribution: Just like deciding how much lemonade each friend gets at your stand, your Founders Agreement needs to address Ownership (Equity) Distribution. This clause determines the initial slice of the "pie" (ownership stake) each founder receives. The agreement should outline a clear and fair process for determining the initial ownership distribution. You may also consider who came up with the initial concept for the startup(though the originator deserves recognition, however, the value should be adjusted based on other contributions, idea should not be the primary factor- we do not recommend allocating so much equity solely because the founder is the idea originator? How much cash or assets did each founder contribute? Will some founders be working full-time, while others contribute part-time (Founders dedicating more time demonstrate greater commitment and may deserve a bigger slice.)? What unique skills or industry knowledge does each founder bring? This could involve assigning a point value to each factor and calculating each founder's ownership percentage based on their total points. The Equity Distribution clause should work in conjunction with the Vesting clause to define the complete picture of ownership allocation.
   • Decision-Making: Sometimes you need to decide things together, like whether to sell a new kind of lemonade or how to spend the money you make. Having a plan for making decisions together helps avoid arguments and keeps the lemonade stand running smoothly. This clause outlines decision-making processes, voting rights, and mechanisms for resolving disputes among the founders. Decisions are made by a majority vote of the founders, with each founder holding voting rights proportional to their ownership stake (unless otherwise specified). For critical decisions (e.g., selling the company, raising capital), a higher voting threshold can be set (e.g., 50% or 75% vote). We currently have a simple majority of 50% in our template. The decision-making process can be adapted to your startup's specific needs and size.
   • Vesting: Vesting is like earning stickers for doing your chores. It's a way to make sure everyone sticks around and works hard. With vesting, you earn your ownership of the lemonade stand over time, so you don't just get it all at once. Establishes a vesting schedule to ensure that founders earn their equity over time, typically subject to continued participation in the company.  Founders might not accrue ownership rights until after a set period (e.g., a one-year cliff). This "cliff" discourages founders from leaving prematurely. After the cliff period, founders earn a portion of their total ownership stake at regular intervals (e.g., monthly or quarterly). If a founder leaves early, they won't walk away with full ownership, minimizing the risk of losing a large portion of the company to someone no longer contributing. 
   • Transfer Restrictions: This clause restricts founders from transferring, pledging, or encumbering their allocated equity to any third party without the consent of the other founders, typically unanimous consent. This helps ensure the company maintains control over who owns shares and who is considered a founder. It prevents a situation where a founder uses their equity as a form of loan security without the knowledge or consent of the other founders.
   • Founder Departure or Termination: Addresses the consequences and procedures in the event of a founder's departure or termination, such as buyback provisions or non-compete obligations. You've been working hard stacking bricks and creating towers, but one day, one of your friends has to leave the castle-building team. They may need to move away or focus on something else. That's like a founder departure. When a founder leaves, figuring out what happens next is important. Who gets their share of the lemonade stand? How do you keep building without them? When a founder leaves the lemonade stand team, it's like losing a member of your lemon-squeezing squad. You need to figure out what happens to their share of the lemonade stand – do they still get a portion of the lemonade money? Who will take over their lemon-squeezing duties? That's why it's important to have a Lemonade Stand Agreement from the beginning. It helps decide what happens if someone needs to leave the lemonade team, so everyone knows what to do if a friend can't squeeze lemons anymore. This clause highlights whether the Founder gets a portion or gets nothing. Termination. Termination happens when someone on the lemonade team isn't following the rules or being fair. Maybe they're not helping with the lemon-squeezing or they're not sharing the profits like they're supposed to. When that happens, the other lemonade stand founders might decide it's time for that friend to leave the team. 
   • Dispute Resolution: Even the best lemonade stands have disagreements sometimes. Having a way to solve problems, like talking things out or asking a neutral person to help, keeps everyone happy and the lemonade flowing.   The template allows for an initial amicable settlement, and arbitration would be the last resort. 
   • Confidentiality and Non-Compete: Includes provisions for protecting confidential information and imposing restrictions on competitive activities during and after the founders' involvement with the startup. A non-compete clause would prevent a departing founder from starting a rival lemonade stand across the street, using the same recipe and targeting the same customers. This prohibits founders from engaging in activities that directly compete with the startup's business for a specified period and within a defined geographical area after leaving the company. This ensures that departing founders do not use insider knowledge or relationships to harm the startup's interests.
   • Governing Law: We have explicitly used Delaware law as the governing law, this may vary depending on your country of jurisdiction or a mutual governing law (which involves putting into consideration the enforceability of the the laws) within that jurisdiction

Now that you understand the details of the founders' agreement, you want to engage with your founders to agree on terms, and the contentious issues noted, ensure everyone is fully aligned, and have a chance to also review, and document what was agreed upon, and incorporate it into the agreement. While a template provides a good starting point, consulting with a lawyer is highly recommended. A lawyer can ensure the language used aligns with regulations and is legally enforceable. Also, you can use the lawyer's expertise in determining the legal structure and licences you may need for your business. However, if discussions are still at the preliminary stage, and you do not have the financial resources to engage a lawyer just yet, you can have the understanding between you and your potential founders stating that when the company is fully set, the terms would then be fully adopted, however, ensure to have all agreed terms documented via an email between the parties involved. 

Once all parties are aligned, share the revised agreement with your co-founders for a thorough review. When everyone is comfortable with the terms, circulate the agreement for signatures. Once all founders have signed the agreement, create a dedicated folder to store the signed documents electronically (A great step to building your data room). In summary, a founders agreement focuses on the relationship, responsibilities, and equity distribution among the founders and sets the foundation for their collaboration in launching and building the startup. Please view the Template Founders Agreement here

How much do lawyers charge, and whom do you recommend To engage?

While we have provided a standard template as a guide, each case is distinct. We recommend sharing the template with your lawyers for further review, which can help you save costs and ensure a comprehensive agreement tailored to your needs (it saves more cost than asking your lawyers to draft from scratch). We are partnered with certain law firms to assist you with the review or drafting of your agreement. Based on experience, fees for a simple review should range between $250 to $2,000, but this may vary.