A Founder’s Service Agreement (FSA) is a legal contract all founders should sign in the early stages of a company’s formation.
It is important Founder’s are in agreement about how they are going to create a company and what the company’s future looks like. Ideally, a FSA should therefore be created and signed before the company is even formed and certainly ahead of any funding rounds.
The FSA includes things that the Founders agree upon such as their roles & responsibilities, equity, obligations, confidentiality clauses and what happens if a Founder decides to leave the company.
A FSA ensures everyone is on the same page and any likelihood of harmful surprises in the future minimised.
Even if you are a sole Founder you should still have a FSA as it will contain important information that protects the company and that investors will want to see.
There is no formal structure to a Founder’s Service Agreement but there are some commonly accepted things that should be included in such agreements.
- Founder’s names and the company’s name
- Ownership structure - Who gets what percentage of the company? What will each person contribute to the company? Are ownership shares subject to a vesting schedule based on continued participation in the company?
- Salary & compensation
- Transfer of ownership - What happens if a Founder wants to leave? What happens if one Founder becomes incapacitated and cannot continue working? If the startup does not succeed and the project is ended, can one Founder pick the idea up again? When the startup is formed, where are IP rights assigned?
- Decision-making, management and dispute resolution - How are key decisions and day to day decisions about the business made? Can other projects be launched and run whilst working on this startup? Under what circumstances can a Founder be removed from the startup? What happens if someone breaches the expectations agreed upon in the FSA? Is there a separation agreement?
- Fundraising - If you raise capital, where will it come from and how much equity are you willing to provide? How much will you raise?
- Hiring - How will future hiring be conducted? What will the employee options pool look like?
No one imagines, nor wants, the scenarios planned for in a FSA to come true and it can be easy to forgo these formalities when it’s all sunshine and rainbows and the future looks bright.
However, you still need a FSA. It will not only help you clarify and navigate day to day operations and your company’s roadmap, but will be invaluable and crucial if things don’t go to plan, which of course can happen. A FSA is critical in ensuring your ability to safeguard the future viability of your company.
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