Many budding entrepreneurs know that starting a successful venture requires creating a legal entity and drafting the associated paperwork, but those documents leave many questions unanswered: What role will each founder play in the new business? How will smaller operational decisions, like whether to sign a contract, be made? Can founders “moonlight” and work other jobs within the industry or participate in independent development? And perhaps most importantly in creative industries like video games and content creation, what rights does each founder have with respect to the intellectual property the company and its various founders, employees, and service providers create?

Founders’ Agreements exist to answer these potentially critical questions. Part of the attraction of Founders’ Agreements, too, is that they are highly adaptable to a variety of stages of business development, from early-stage agreements sketching out a potential venture that has not yet been launched, to governing a product that hasn’t yet been developed into a sustainable business, to governing specific operational verticals.

Most Founders’ Agreements speak to some combination of the following subjects: (i) equity; (ii) roles and responsibilities; (iii) restrictive covenants like confidentiality agreements, non-competes and non-solicits; (iv) rights in intellectual property; and (v) dispute resolution.

Equity

Equity, meaning ownership in the legal entity operating the business, is often the most important subject in a Founders’ Agreement that predates formation of that legal entity. Comprehensive equity conversations captured in the Founders’ Agreement includes aligning on each founder’s ownership percentage, whether that equity will vest over time or not, whether that equity may vest early if certain conditions are met, and what rights that equity carries with it (e.g. voting and distribution rights).

Roles and Responsibilities

Founders’ roles in a new venture vary wildly from business to business. Some founders offer value primarily through capitalizing the endeavor, others offer operational expertise, others are relationship hubs connecting the business to valuable partners, and still others lie at the head of the business’s creative undertakings. Outlining these roles early, including via distribution of officer titles like “Manager”, “Chief Executive Officer”, or even simply “Investor” can help avoid any confusion with regard to who is responsible for what, as well as how these roles may evolve over time, potentially with associated compensation adjustments.

Restrictive Covenants

Founders’ Agreements typically impose confidentiality restrictions, preventing any inadvertent or early disclosure of an exciting new business idea, or ensuring marketing beats hit the appropriate rhythm. They may also impose non-solicitation provisions to avoid disruptions to the new company’s business. Finally, they may impose non-compete obligations to ensure a founder devotes their full attention to the new business or at minimum does not limit its market potential through competition. These restrictive covenants may be imposed purely for the intended value they provide, or may be imposed as a condition of early investment in the new company.

Intellectual Property

For businesses focused on creation of any work of authorship, intellectual property is “the” central asset to the company’s success. In order to nurture the growth of that asset, new companies need to ensure the founders contributing any intellectual property assign the ownership of that asset to the company, even if they created that intellectual property before the company was formed. However, the scope of that assignment should be carefully crafted; for some businesses engaging in a wide variety of creative spaces, a broad scope may be appropriate, but if the intention is solely for the business to engage in a narrow industry (or the company wants to permit side projects and even second jobs), a narrower scope or explicit carveout of other projects may be appropriate.

Once the company owns all the intellectual property it should, the Founders’ Agreement should describe each founder’s relationship to that intellectual property. Founders creating music, for example, may assign rights to the music to the company, but receive a license back to them as an individual to perform and publish their original compositions. Where founders receive rights to commercially exploit the company’s intellectual property separately, Founders’ Agreements may prescribe royalty splits and associated reporting and audit mechanics.

Dispute Resolution

Founders collaborate on new ventures because they believe in their complementary skillsets and see a fruitful relationship in the business moving forward, but that collaboration does not always work out. Thorough dispute resolution processes, like appointing intermediaries or electing to settle irreconcilable disputes through arbitration or mediation, can provide resolution in a cheaper and quicker manner that often causes less collateral damage to the burgeoning brand of the business than protracted litigation.

Final Thoughts

Founders’ Agreements serve a vital role for many startups by addressing many critical aspects of a new business. Whether founders just built an exciting game at a game jam, have been putting together a shared business idea for years, or have already set up an entity and begun operating, adopting a Founders’ Agreement may resolve critical questions and settle disputes before they arise.

For studios seeking tailored guidance on equity structure, intellectual property, or other founding concerns, our team is available for an initial conversation. This article is provided for informational purposes only and does not constitute legal advice.