The founding partners’ agreement

The founding partners’ agreement: a clear image of the team for investors, internal rules for entrepreneurs.

Are you planning to create your
start-up
with other entrepreneurs? This article concerns you. By definition, a founding partners’ agreement is a confidential contract signed by the company’s co-founding shareholders. The founding partner is a member of the company who participated in its creation. What are the objectives of this agreement? How does it differ from the company’s articles of association and shareholders’ agreement when raising capital? What are the penalties for non-compliance? What are the main clauses in a partnership agreement? We’ve got your back!

What are the objectives of the founding partners’ agreement?

Define how you want to run and manage your start-up

Your founding partners’ agreement has several objectives. One of them is to define the terms of leadership and management of your start-up between the co-founders. This means answering the following questions:

• how are decisions made in your company?
• who is the company’s legal representative vis-à-vis third parties?
• Can the founders work outside the start-up?

Determining capital entry and exit conditions

The agreement also sets out the conditions for entering and leaving the start-up‘s capital. To do so, answer these questions:

• when and to whom can shareholders sell their shares?
• in what cases will a founder be obliged to return his or her shares if he or she behaves in a way that does not comply with the covenant?

Give investors a clear picture of the team

The partners’ agreement gives investors an overview of how your start-up‘s team will operate, prior to raising funds. This agreement is a kind of internal regulation for entrepreneurs setting up their own business. So make sure your pact is as clear and balanced as possible (particularly in terms of governance rules). This balance will create a spirit of cohesion within your team.

Different objectives from articles of association and other shareholder agreements

What’s the difference with articles of association? The main purpose of the articles of association is to organize the life of your company (board of directors, general meetings, registered office, etc.). The founding partners’ agreement provides a written framework for relations between the founders. In principle, this is a secret document, whereas articles of association are public, as they must be filed with the Registrar. Third parties are therefore unaware of this agreement, drawn up in parallel with the company’s bylaws.

Is a partnership agreement the same thing as a shareholders’ agreement? Yes, these two expressions coexist. But here, we’re talking more specifically about the pact made between the start-up‘s founders at its inception. It must therefore be distinguished from the shareholders’ agreement signed with investors as part of a fund-raising operation.

Penalties for non-compliance with the shareholders’ agreement

What is the penalty for breaching the obligations defined in this shareholders’ agreement? In principle, the payment of damages to the victim shareholders, to compensate for the loss they have suffered. However, in certain cases, case law has allowed forced execution.

What are the main clauses in a partnership agreement?

Pre-emption clause

The pre-emption clause governs the case of a shareholder wishing to sell all or part of his shares to a third party. It obliges him to offer his shares in priority to the other start-up partners.

Example: Hamid decides to sell his shares back to Moussa (who is not a shareholder in the start-up). The remaining shareholders have the right to offer to buy Hamid’s shares at the same price as Moussa. Because they have priority.

Approval clauses in shareholders’ agreements

The approval clause requires the prior approval of the other shareholders (or a corporate body) for the transfer of shares to a third party.

Let’s take the case of Hamid, who wants to sell his shares to Moussa (a non-shareholder). He must first obtain the authorization of the company’s Board of Directors and/or other shareholders.

The provision relating to intellectual property rights

This provision obliges shareholders to transfer to the company their economic rights as authors of creations and innovations. Which ones? All those produced or developed as part of the company’s activities.

For example, all the innovations developed by Fati, the company’s CTO(Chief Technical Officer), are transferred to the start-up. They are also registered in the start-up‘s name.

Directors’ commitment to the shareholders’ agreement

The non-competition clause prevents associates from engaging in any activity in competition with that of the company, for a certain period of time.

Example: Khadija undertakes, for as long as she is a shareholder, to devote most of her time to her duties in the start-up. She may not hold any employment contract, executive office or service contract outside the Company. This is unless the other co-founders of the start-up have given prior notification or authorization.

Exclusion clause for start-up managers

The exclusion clause makes it possible to exclude an executive shareholder from the company, and oblige him to sell his shares to the other shareholders. In which cases? When its behavior no longer meets certain essential conditions defined in the covenant.

Take Soumia, for example, who deliberately breached her confidentiality and non-competition obligations. She will then have to sell her shares, under the terms of the founding partners’ agreement she signed.

Good and bad leaver clauses

It enables key managers/shareholders to remain with the company for a set period of time. This is a period during which associates, because they play an important role, cannot leave the company. Anyone who leaves before this time is punished(bad leaver); anyone who respects it is rewarded(good leaver).

Example: Souad, a manager, is required to stay with the company for 24 months, but she resigns after the ^12th month. It may therefore be forced to sell its shares at an unfavorable price, below market value(bad leaver).

Other provisions may also be included in the partnership agreement:

• liquidity clause ;
• joint exit obligation( drag along clause) ;
• governance provisions ;
• information/control clause ;
• etc.

Whatever the case may be, it’s important to negotiate and draft the agreement carefully. So don’t hesitate to seek legal advice if you don’t know how to draw up a partnership agreement. It may also be advantageous to train yourself to understand the main concepts of shareholders’ agreements.