Formation document and founders' agreement

Starting a business in Denmark requires documents, and two of them confuse many entrepreneurs: the formation document and the founders' agreement. They sound similar and cover related topics, but they are legally very different and serve different purposes.

This guide explains what the two documents are, when you need them, and what they should contain. Whether you start alone or with co-founders, having these documents in order is the foundation of a well-organised business.

Formation document: the formal registration document

What is a formation document?

A formation document is the formal legal document that forms a private limited company (ApS) or a public limited company (A/S). It is mandatory, must contain specific information and be signed by all founders.

The formation document is filed with the Business Authority as part of the company registration. Without it, the company cannot be registered and does not get a CVR number.

What must the formation document contain?

Under section 26 of the Companies Act, the formation document must, among other things, contain:

1. The founders' name, residence and any CVR number
2. The subscription price for the shares
3. The deadlines for subscription and payment of the capital
4. The date of the formation's legal effect and of its accounting effect
5. Information on the costs of the formation, if the company is to bear them

The formation document is signed by the founders with a date, and the articles are drawn up at the formation and attached.

For an ApS, the following also applies:

• A minimum requirement for the share capital of DKK 20,000
• The capital can be paid in cash or as a contribution in kind (assets)
• For a contribution in kind, a valuation report from an auditor is required

The articles

The articles are the formal rules that govern the company's internal life. They are drawn up at the formation and must, under section 28 of the Companies Act, as a minimum contain:

• The company's name and any secondary names
• The company's purpose
• The size of the share capital and the nominal value of the shares
• The shares' rights
• The management structure (executive management and any board)
• The rules on convening the general meeting
• The financial year

The articles are a public document that anyone can see via the Business Authority.

Recommendation: Keep the articles relatively simple and general. The more detailed governance of ownership is better regulated in an owners' agreement, which is not public.

Founders' agreement: the private agreement between the founders

What is a founders' agreement?

A founders' agreement is a private agreement between co-founders that governs the relationship between them. It is not mandatory, but it is often one of the most important contracts you enter into as an entrepreneur.

The founders' agreement is not public and is not part of the Business Authority's registration. It is an internal agreement that applies between the parties.

What distinguishes the founders' agreement from the owners' agreement?

The terms are sometimes used interchangeably, but there is a difference:

• The founders' agreement is made at the formation and focuses on the start-up terms: who contributes what, what are the early roles, and what happens if a founder leaves the project early?
• The owners' agreement is a more long-term document that governs the owners' rights and obligations on an ongoing basis, including what happens on a sale, new investors and an exit.

In practice, the founders' agreement is often integrated into the owners' agreement, or one replaces the other over time.

When do you need a founders' agreement?

Always, if you form with others. Friendship, family relationships or previous cooperation are not a substitute for a written agreement. On the contrary, they are good reasons for extra clarity.

Most founder disputes arise from unresolved expectations from the start:

• Who gives up their other activities for the company?
• What happens if one founder does not contribute as promised?
• Who decides if you disagree?
• What is the company worth, and who may sell?

What should a founders' agreement contain?

1. Ownership shares and capital contribution

State the precise ownership share for each founder (for example 50/50 or 60/25/15) and what it corresponds to in capital contribution or contribution. If a founder has come in with know-how, work effort or IP rather than cash, document it with an agreed value.

2. Vesting: earning ownership over time

Vesting is one of the most important elements in a founders' agreement. It means that the founders' ownership shares are earned gradually over a period (typically 3-4 years with a cliff of 1 year).

Example:

"Founder A's share of 40% vests over 4 years with a cliff of 1 year. On departure within 12 months, the whole share is forfeited. Thereafter, 1/48 of the share vests per month."

Vesting protects the company against a co-founder who leaves the project early but keeps a large ownership share that can block decisions and investor interest.

3. Roles and responsibilities

Who is the day-to-day manager? Who leads product development? Who handles sales and customers? State the primary areas of responsibility and what happens if the roles change.

4. Decision rules

Which decisions require agreement, and which can be made by one founder alone? Consider:

• Unanimity for bringing in investors, a merger or sale, changing ownership shares and taking out larger loans
• A simple majority for hiring, day-to-day operations and marketing

5. Competition and side activities

May the founders have other projects on the side? What about projects that compete with the company? Set clear limits.

6. Right of pre-emption and sale restrictions

If a founder wants to sell their share, the other founders should have a right of pre-emption. State:

• The procedure (a written offer notice and a response deadline)
• The mechanism for setting the price (negotiation or an independent valuation)

7. Deadlock provision

What happens if the founders disagree and no one moves forward? A deadlock clause gives a way out, for example mediation or a buy-sell mechanism where one offers a price and the other chooses to buy or sell at that price.

8. Death and incapacity

What happens if a founder dies? Is the share inherited by the family, or do the other founders have the right to redeem it at a fair price? State it expressly.

9. Confidentiality and IP

The founders should transfer the IP they bring into and create for the company to the company. The confidentiality obligation should apply both during and after the end.

10. Termination and liquidation

When can the founders' agreement be terminated? When is the company dissolved, and in what order are the funds distributed?

Practical step by step: from idea to formed company

1. Agree the founders' agreement and sign it before you form the company
2. Draft the articles based on the agreed ownership shares and governance rules
3. Pay in the share capital (at least DKK 20,000) to a new bank account
4. Sign the formation document (all founders sign)
5. Register the company with the Business Authority via virk.dk with the formation document and articles
6. Receive the CVR number, often quickly with digital registration

Frequently asked questions

Is the founders' agreement legally binding?

Yes. A signed founders' agreement is a legally binding contract. It is not public, but it can be enforced against the parties who have signed.

Can we make a founders' agreement even if we are only two founders?

Yes, and it is actually most critical with two founders in a 50/50 structure, because the risk of deadlock and disagreement is greatest with equality.

What does it cost to form an ApS?

The Business Authority charges a registration fee (check the current rate at virk.dk). In addition, at least DKK 20,000 must be contributed as share capital. Any legal assistance comes on top, unless you use a template.

Does the founders' agreement have to be changed when investors come in?

It should be updated. New investors will typically require the existing agreement to be compatible with the new investor rights. An owners' agreement that incorporates the investor rights is the normal structure.

Can we switch from a founders' agreement to an owners' agreement?

Yes, and it is recommended. When the company grows beyond the early start-up phases, the founders' agreement should be replaced by a more detailed owners' agreement that addresses the new realities.

Conclusion

A proper founders' agreement and a correct formation document are the foundation of a healthy business. The formation document and the articles are the formal, public documents that form the company, while the founders' agreement is the private agreement that governs the relationship between the founders. It takes time to do it right, but it saves a lot of time and money if disagreements later arise.

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The content of this article is for guidance only and does not constitute legal advice. Consult a lawyer for advice on your specific situation.