Founder Agreement - Top 20 Mistakes to avoid!

1. Not having a founder agreement: One of the most common mistakes that entrepreneurs make is not having a founder agreement in place. This can lead to conflicts and disputes later on, especially if the company becomes successful and the stakes are higher.
2. Lack of clarity in roles and responsibilities: Another common mistake is not clearly defining each founder's roles and responsibilities. This can lead to confusion and conflicts over who is responsible for what.
3. Unequal equity split: It is important to ensure that the equity split is fair and equitable amongst all founders. Unequal equity splits can lead to resentment and can impact the company's culture and dynamics.
4. Not addressing potential future scenarios: Founders should also consider potential future scenarios and include clauses in the agreement to address them. For example, what happens if one founder wants to leave the company or if a founder passes away?
5. Not seeking legal advice: Founders should seek legal advice when drafting the founder agreement to ensure that it is legally binding and covers all necessary aspects.
6. Not revisiting the agreement: Finally, founders should revisit and update the founder agreement as the company grows and evolves. The agreement should be reviewed regularly to ensure that it still reflects the company's current needs and goals.
7. Not including vesting provisions: Vesting provisions specify how and when founders' equity in the company is earned over time. Not including vesting provisions can lead to disputes over equity ownership.
8. Not addressing intellectual property ownership: Founders should clarify who owns the intellectual property developed by the company, including any patents, trademarks, and copyrights.
9. Lack of confidentiality and non-compete provisions: Founders should include confidentiality and non-compete provisions to protect the company's intellectual property, trade secrets, and confidential information.
10. Not defining decision-making procedures: Founders should define how major decisions are made within the company, such as how to raise capital, hire key employees, and enter into partnerships.
11. Lack of dispute resolution mechanisms: The founder agreement should include dispute resolution mechanisms, such as mediation or arbitration, to avoid costly and time-consuming litigation.
12. Not considering tax implications: Founders should consider the tax implications of the equity structure and compensation packages they agree upon in the founder agreement.
13. Ignoring legal and regulatory compliance requirements: Founders should ensure that the company is compliant with all legal and regulatory requirements, including securities laws and data privacy regulations.
14. Not including termination provisions: Founders should include termination provisions that specify how and under what circumstances a founder's relationship with the company can be terminated.
15. Lack of a vesting schedule for options: If the company offers stock options to employees or founders, it is important to have a vesting schedule in place.
16. Not addressing the use of company resources: The founder agreement should specify how company resources, such as equipment, funds, and intellectual property, can be used by founders.
17. Not specifying the exit strategy: Founders should specify the exit strategy, such as a potential acquisition or IPO, in the founder agreement.
18. Not considering the impact of a founder's departure: The founder agreement should consider the impact of a founder's departure on the company, including how it will affect the remaining founders, employees, and investors.
19. Lack of accountability and performance expectations: The founder agreement should set performance expectations and hold founders accountable for meeting those expectations.
20. Not including a non-disclosure agreement: Founders should include a non-disclosure agreement that prohibits the disclosure of confidential information to third parties.

Now guess what, all of these points were generate by GPT4.

I have then asked it to generate a draft founder agreement for a fictional fintech startup where I own 60% and my co-founder would own 40%. It first refused to do it, as it has a safe to not write any legal documents, but when I instructed it to write it for educational purpose, here is what I got

Founder Agreement

This Founder Agreement (the "Agreement") is made and entered into as of [insert date] (the "Effective Date") by and between:

[Your Name], residing at [insert address] (the "Founder 1"), and

[Co-Founder's Name], residing at [insert address] (the "Founder 2").

Collectively, Founder 1 and Founder 2 shall be referred to as the "Founders."

Purpose and Scope

The purpose of this Agreement is to set forth the understanding between the Founders with respect to the establishment of a fintech startup (the "Company").

Ownership and Equity

The Founders agree that the ownership and equity of the Company shall be allocated as follows:

• Founder 1 shall own 60% of the Company's equity, and
• Founder 2 shall own 40% of the Company's equity.

Roles and Responsibilities

The Founders agree to take on the following roles and responsibilities in the Company:

• Founder 1 shall be responsible for [insert responsibilities], and
• Founder 2 shall be responsible for [insert responsibilities].

The Founders agree to work collaboratively to make the Company a success, and to keep each other informed about all material developments and decisions regarding the Company.

Intellectual Property

The Founders agree that all intellectual property developed by the Company, including patents, trademarks, copyrights, and trade secrets, shall be jointly owned by the Founders.

Decision-Making

The Founders agree that all major decisions regarding the Company, including those related to financing, hiring, and strategic partnerships, shall be made jointly by the Founders.

Dispute Resolution

In the event of any dispute or disagreement between the Founders relating to this Agreement or the Company, the Founders agree to engage in good faith efforts to resolve the dispute through mediation or other non-binding alternative dispute resolution methods.

Termination

This Agreement may be terminated by mutual agreement of the Founders at any time. In the event of termination, the Founders shall work together in good faith to wind up the affairs of the Company and distribute any remaining assets in accordance with their ownership percentages.

Confidentiality

The Founders agree to keep all confidential information related to the Company, including trade secrets, proprietary information, and confidential customer information, confidential and not to disclose such information to third parties.

Governing Law

This Agreement shall be governed by and construed in accordance with the laws of [insert governing law].

Entire Agreement

This Agreement represents the entire understanding between the Founders with respect to the establishment of the Company, and supersedes all prior negotiations, understandings, and agreements between the Founders.

IN WITNESS WHEREOF, the undersigned have executed this Founder Agreement as of the date first written above.

[Founder 1]

[Founder 2]

This is really not bad as a start! I have then asked GTP4 to add vest-in period and vision statement to generate an updated agreement

Founder Agreement

This Founder Agreement (the "Agreement") is made and entered into as of [insert date] (the "Effective Date") by and between:

[Your Name], residing at [insert address] (the "Founder 1"), and

[Co-Founder's Name], residing at [insert address] (the "Founder 2").

Collectively, Founder 1 and Founder 2 shall be referred to as the "Founders."

Purpose and Scope

The purpose of this Agreement is to set forth the understanding between the Founders with respect to the establishment of a fintech startup (the "Company").

Ownership and Equity

The Founders agree that the ownership and equity of the Company shall be allocated as follows:

• Founder 1 shall own 60% of the Company's equity, and
• Founder 2 shall own 40% of the Company's equity.

Vesting

The Founders agree to a three (3) year vesting schedule, beginning on the Effective Date of this Agreement. If either Founder leaves the Company prior to the completion of the vesting period, any unvested equity shall be forfeited.

Roles and Responsibilities

The Founders agree to take on the following roles and responsibilities in the Company:

• Founder 1 shall be responsible for [insert responsibilities], and
• Founder 2 shall be responsible for [insert responsibilities].

The Founders agree to work collaboratively to make the Company a success, and to keep each other informed about all material developments and decisions regarding the Company.

Intellectual Property

The Founders agree that all intellectual property developed by the Company, including patents, trademarks, copyrights, and trade secrets, shall be jointly owned by the Founders.

Decision-Making

The Founders agree that all major decisions regarding the Company, including those related to financing, hiring, and strategic partnerships, shall be made jointly by the Founders.

Startup Vision

The Founders agree that the Company's vision is to [insert startup vision].

Dispute Resolution

In the event of any dispute or disagreement between the Founders relating to this Agreement or the Company, the Founders agree to engage in good faith efforts to resolve the dispute through mediation or other non-binding alternative dispute resolution methods.

Termination

This Agreement may be terminated by mutual agreement of the Founders at any time. In the event of termination, the Founders shall work together in good faith to wind up the affairs of the Company and distribute any remaining assets in accordance with their ownership percentages.

Confidentiality

The Founders agree to keep all confidential information related to the Company, including trade secrets, proprietary information, and confidential customer information, confidential and not to disclose such information to third parties.

Governing Law

This Agreement shall be governed by and construed in accordance with the laws of [insert governing law].

Entire Agreement

This Agreement represents the entire understanding between the Founders with respect to the establishment of the Company, and supersedes all prior negotiations, understandings, and agreements between the Founders.

IN WITNESS WHEREOF, the undersigned have executed this Founder Agreement as of the date first written above.

[Founder 1]

[Founder 2]

Again, really not bad and you could add more and more constraints to this, up to a point where you get the document you are looking for. Then you will just need to get if reviewed by a lawyer...

As founders we make a lot of mistakes because of things we don't, and the answers are not always easy to find, this is where LLMs and GTP4 is a game changer! I believe this technology will rapidly turn into our day to day companion.

Do you agree? What are your thoughts on this?