Founders’ Agreement in Startup Companies in Israel
Entrepreneurs who have a vision of a product, must engage in active cooperation to bring it to life. In order to establish a startup company in Israel, a founders’ agreement should be made at the very beginning of the process. The agreement is made in order to define the relations between the entrepreneurs and to help prevent future misunderstandings.
What should be included in this agreement? A corporate law expert from our law office explains.
The Decker, Pex, Levi law offices Jerusalem and Tel Aviv, specialize in corporate law. We provide comprehensive legal services to entrepreneurs and startups; including consultation and legal assistance at the different stages of startup establishment, creating a founders’ agreement, company registration, etc.
The Importance of Creating Founders’ Agreement in Startup Companies
Imagine that you have a brilliant idea for a product or new development. How would you turn this vision into a reality? There are several actions you should take. You need to locate other entrepreneurs who you can collaborate with. You also need to contract external help, such as suppliers and financing sources, in order to acquire the resources and inputs required for fulfilling your vision.
According to the Israeli Companies Law, when entrepreneurs act in the name of a company which isn’t yet established, the company will not be obligated to approve actions that were made on its behalf. It means that entrepreneurs are exposed to personal lawsuits in such cases. This could be prevented if the company is already established, or obligated in advance to approve those actions. An optimal way to prevent uncertainties in this regard, is to create a founders’ agreement, which will accurately define the startup, its goals and the relations between the entrepreneurs.
What Topics Should Be Included in the Agreement?
The content of the agreement might vary, based on the needs and characteristics of the project. However, there are some important topics that should be considered as the project is being formed. Below we will elaborate on some of the main topics.
Division of Labor
It is important that the agreement will define the areas of responsibility for each of the founders in as much detail as possible. Apart from defining the official role of each entrepreneur, it is desirable for the agreement to specify the amount of hours each will devote to different stages of the project. IA different scope of hours is generally set based on the project’s development.
Company’s Structure, Institutions & Goals
As mentioned, a company is not always officially established from the very beginning of the work on the project. There are several possible reasons: saving costs (registration fees, payment of different taxes, opening a bank account and so on) and also uncertainty regarding the future.
A founders’ agreement is meant to make things clear. Thus, it should define the goals of the company (even before it start the registration process), its structure, its shares capital and the way it is distributed, its planned date of establishment and the fate of liabilities the entrepreneurs would take on its behalf.
Board of Directors
The company’s board of directors and its powers should be defined in the agreement as well. That includes the number of directors, the identity of the chairman of the board, its powers and ways of making decisions. Due to the wide range of possibilities, it is important to think deeply about the most suitable ones, even at this initial stage of the project. The way the company will be managed in the future depends on all the above factors.
Intellectual Property (IP), Confidentiality and Non-competition
Another crucial part of the agreement is the entrepreneurs’ and the company’s IP. In many cases, the founders’ agreement is being signed on in the initial stages of the project, before any production begins. Nevertheless, it is important to define the ownership of future products and IP assets – who would own patents or creative works that will be developed? Will the ownership be by percentage divided between the entrepreneurs? And if so, what would be the exact division?
Another legal issue, which is derived from that, is related to confidentiality and non-competition. Startups usually own trade secrets that are protected in Israel under the Commercial Torts Law. Accordingly, it is customary to include non-competition articles in the agreement. The term of the non-competition article must be reasonable and meet the requirements of the law. For more information on this important topic, you can read another article which was published on our website.
Contact Us
In this article we elaborated on main points that should be considered when forming a founders’ agreement between entrepreneurs in a startup company. Although there are different types of agreements, it is always important to create them at the earliest possible stage. For any further questions, you can contact us. Our law offices specialize in corporate and hi-tech law, and accompanying startups and entrepreneurs, throughout the different stages of their projects.
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