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3 reasons why a founders' agreement is essential

Starting a business is an exciting endeavor. However, before you roll out any products or offer your services, you should ensure that you protect your company from internal instability.

While there is no legal requirement for a business to have a formal founders' agreement, business partners should have one to avoid potential issues down the line. Here are three reasons why a founders' agreement is important for a sustainable business.

1. Formalize equity and ownership

A founders' agreement is an important legal document. One of the things that it formalizes is the equity of each business partner. It can also establish guidelines for how shares can be bought and sold by owners and how new partners can join the ownership structure.

While you may not be thinking about partners coming and going at the start of your business, these situations will likely occur in the future. Without a formalized process, this can lead to disputes between partners down the road.

2. Establish roles and responsibilities

A well-run organization has a clear power structure. This provides clarity regarding who is responsible for what. A founders' agreement can establish roles and responsibilities for each partner. This part of the document ensures that each party acknowledges their responsibilities in writing.

3. Assign intellectual property to the business

According to Bo Yaghmaie, the Head of New York Business & Finance Group, one of the most important things for founders to do is to consolidate important intellectual property (IP) to the business.

In his experience, many founders develop an idea and then separate. If they do this before the IP has been assigned to the business entity, the business may not be able to get access to essential IP.

Making a business ship-shape

Starting a business can be like going out to sea. The journey is likely to be tumultuous. Along the way, you will experience many hazards. However, a well-structured founders' agreement can help ensure that your business is prepared to stay afloat.

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