Discuss: Just because you’re friends doesn’t mean you don’t need a founder’s agreement

The founder’s agreement is rarely discussed when co-founders start a business together. In a previous article, I talked about how early-stage founders tended to divide shares equally. On top of that, each of them is a director on the board, regardless of their role. They do not discuss the share ownership and responsibilities, let alone draft a founders’ agreement.

I noticed this with the many founders I spoke with. They thought a founder’s agreement was unnecessary, as there are laws like the Companies Act and the Constitution to protect shareholders. Founders also usually say that they trust each other and see no need to get so formal.

To break this myth, I asked Yong Yong Chia, a commercial lawyer who is part of the Asia Law Network, for her insights.

Chia explains that a partnership/founder’s/shareholder’s agreement serves many important functions, including:

• Identifying the partners/founders/shareholders
• Stating the purpose of the partnership/company
• Stating the role of each partner/founder/shareholder
• Stating their contributions to the company
• Defining their obligations and responsibilities to the company
• Defining their individual entitlements
• Defining the rights and powers of the respective partners/founders/shareholders
• Providing for resolution of deadlock
• Providing for equity transfer restrictions and anti-dilution
• Providing for confidentiality and non-competition
• Providing for dispute resolution mechanisms
• Providing for exit

She also mentioned that if founders have a close relationship, this does not mean they agree on certain issues all the time. According to her, “Having an agreement at the start of the venture, when all parties are friendly, enables all parties to consider issues objectively for the future of their relationship and the business, and is a healthy strategic start.”

With regard to the Companies Act, Chia said:

“The law protects certain basic rights of the parties and prescribes critical obligations. However, the myriad permutations of relationships between founders/partners/shareholders take the rights and obligations of the respective parties beyond those basic rights and obligations, and parties are at liberty to and should agree on how they should conduct themselves and the business for the benefit of all relevant stakeholders.”

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