Founders' Agreement
/faʊndəz əˈɡriːmənt/
A Founders' Agreement is a key legal document that defines each founder's roles, responsibilities, and ownership stakes, ensuring clarity and alignment in a startup.
Why do founders need a Founders' Agreement?
A Founders' Agreement protects everyone involved by making expectations crystal clear from the start.
It prevents misunderstandings about who owns what, who's responsible for what, and how decisions get made.
Think of it as a prenup for your business relationship - it's much easier to agree on terms when everyone's getting along than during a dispute.
What should a Founders' Agreement include?
Your Founders' Agreement should cover equity splits (who owns what percentage), roles and responsibilities, decision-making processes, and intellectual property ownership.
It should also address what happens if a founder leaves, how new founders might join, and whether there are any restrictions on selling shares.
Many agreements include vesting schedules to ensure founders earn their equity over time.
How does a Founders' Agreement handle equity distribution?
A Founders' Agreement typically specifies each founder's ownership percentage and whether those shares vest over time.
Vesting means you gradually earn your full share allocation - commonly over three to four years - which protects the company if someone leaves early.
The agreement should also clarify what happens to unvested shares if a founder departs.
Where would I first see a Founders' Agreement?
You'll typically encounter a Founders' Agreement when you and your co-founders decide to formalise your working relationship, usually before or shortly after registering your company.
When should you create a Founders' Agreement?
You should establish a Founders' Agreement as early as possible - ideally before incorporating your company or immediately afterwards.
Creating this agreement early, when relationships are strong and everyone's optimistic, makes difficult conversations much easier.
Delaying this conversation often leads to assumptions, disagreements, and potentially costly legal disputes down the line.
Can a Founders' Agreement be changed later?
A Founders' Agreement can be modified, but typically all founders must agree to any changes.
The original agreement should include provisions for amendments and specify what percentage of founders must approve modifications.
As your company evolves, you might need to update terms, but having that initial framework makes changes more straightforward.
What happens if founders don't have a Founders' Agreement?
Without a Founders' Agreement, disputes are resolved by whatever rules your company's governing documents contain, or potentially through expensive legal proceedings.
You'll have no clear process for handling departures, disagreements, or equity questions.
This uncertainty can damage relationships, harm the business, and make it difficult to attract investors who want to see professional governance structures in place.
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