What is a Founders Agreement?
A Founders Agreement is a legally binding contract signed by the co-founders of a startup that establishes the rights, responsibilities, and obligations of each founder. It serves as the foundation for the working relationship and helps prevent disputes by addressing key issues upfront.
Purpose of a Founders Agreement
- Clarify Expectations: Define roles, responsibilities, and commitments
- Protect Equity: Establish vesting schedules and ownership structure
- Prevent Disputes: Address potential conflicts before they arise
- Secure IP: Ensure company owns all intellectual property
- Define Exit: Set rules for founder departure scenarios
- Investor Readiness: Demonstrate professionalism to potential investors
When Should You Sign?
Ideally, founders should sign the agreement before starting operations or incorporating the company. At minimum, it should be in place before raising external funding or generating significant revenue.
Why is it Important?
Without a founders agreement, startups face significant risks that can lead to company failure.
Risks Without Agreement
- • Unclear equity ownership
- • Disputes over IP ownership
- • Founder exits without transfer rules
- • Unequal contribution conflicts
- • Inability to raise investment
Benefits With Agreement
- • Clear ownership structure
- • Protected company IP
- • Defined exit mechanisms
- • Fair contribution expectations
- • Investor confidence
Key Components
| Component | Description |
|---|---|
| Equity Split | Percentage ownership for each founder |
| Vesting Schedule | Timeline for earning full equity rights |
| Roles & Responsibilities | Each founder's position and duties |
| IP Assignment | Transfer of all IP to the company |
| Decision Making | Voting rights and conflict resolution |
| Exit Clauses | Terms for voluntary/involuntary departure |
| Non-Compete | Restrictions on competing activities |
Equity Ownership & Splits
Determining equity split among founders is one of the most critical decisions. Common approaches include equal splits, contribution-based splits, and dynamic splits.
Equity Split Models
Equal Split (50/50, 33/33/33)
Best for: Co-founders with similar backgrounds, equal commitment, and complementary skills.
Contribution-Based Split
Based on: Idea origin, capital invested, full-time vs part-time commitment, industry expertise.
Dynamic/Graded Split
Equity adjusts based on milestones achieved and value contributed over time.
Vesting Schedules Explained
Vesting means founders earn their equity over time rather than receiving it immediately. This ensures continued commitment to the company.
| Vesting Element | Typical Terms |
|---|---|
| Vesting Period | 4 years (standard) or 3 years |
| Cliff Period | 1 year (no vesting until cliff is reached) |
| Vesting Frequency | Monthly or quarterly after cliff |
| Acceleration | Single/Double trigger on acquisition |
Example: 4-year vesting with 1-year cliff means if a founder leaves before 1 year, they get 0%. After 1 year, they get 25% (1/4th), then remaining 75% vests monthly over next 3 years.
Roles & Responsibilities
Clearly defining roles prevents overlap, ensures accountability, and establishes decision-making authority.
CEO/COO
- • Strategic direction
- • Investor relations
- • Team building
- • Fundraising
CTO
- • Product development
- • Technical architecture
- • Engineering team
- • Technology decisions
CMO/CBO
- • Marketing strategy
- • Customer acquisition
- • Brand building
- • Revenue growth
Intellectual Property Assignment
All intellectual property created by founders before and during their involvement must be assigned to the company.
IP Assignment Checklist
- ✓ Patents and patent applications
- ✓ Trademarks and brand elements
- ✓ Copyrights (code, designs, content)
- ✓ Trade secrets and know-how
- ✓ Domain names and social media handles
- ✓ Pre-incorporation contributions
Exit Clauses & Buyback
Exit clauses define what happens when a founder leaves, whether voluntarily, involuntarily, or through termination.
| Exit Type | Treatment |
|---|---|
| Voluntary Resignation | Unvested shares forfeited; Company right to buy vested shares at FMV or nominal value |
| Termination for Cause | All shares (vested and unvested) may be forfeited or bought at nominal value |
| Death/Disability | Acceleration of vesting; Estate can retain or sell shares |
| Involuntary (Without Cause) | Vested shares retained; Unvested shares forfeited |
Frequently Asked Questions
Can a Founders Agreement be modified?
Yes, with written consent of all founders. It's good practice to review annually or when significant changes occur.
What happens if a founder doesn't sign?
Without signature, the agreement is not binding on that founder. This creates significant risk for the company and other founders.
How is Founders Agreement different from SHA?
Founders Agreement is between co-founders. SHA involves all shareholders including investors. SHA typically replaces/supersedes Founders Agreement after investment.