Founder Agreements: Why You Need One Before Launch

Starting a business with co-founders is exciting. You're aligned on vision, passionate about the idea, and ready to build something great together. But without a founder agreement, you're setting yourself up for conflict, confusion, and potentially catastrophic disputes that can destroy your company before it even launches.

What is a Founder Agreement?

A founder agreement is a legal contract between co-founders that defines ownership, roles, responsibilities, decision-making authority, and what happens in various scenarios (departure, disagreement, acquisition, etc.). It's the foundational document that governs your relationship and protects everyone's interests. Think of it as a prenup for your business.

Why You Need One Before Launch

Many founders delay creating a formal agreement, assuming they'll 'figure it out later' or that their friendship is strong enough to handle any issues. This is a costly mistake. Here's why: Equity and ownership disputes are one of the leading causes of startup failure. Verbal agreements are unenforceable and memories differ over time. Investors won't fund startups without clear founder agreements. Future disagreements are inevitable—protecting the company now avoids disaster later. Creating an agreement when everyone is aligned is much easier than negotiating during conflict.

Key Components of a Founder Agreement

Equity Allocation: How is ownership divided among founders? Is it equal or weighted based on contribution, experience, or other factors? Equity splits should reflect each founder's expected contribution and value to the company. Clearly document the rationale so everyone understands and agrees.

Vesting Schedules

Even after agreeing on equity splits, implement vesting schedules. Vesting means founders earn their equity over time (typically 4 years with a 1-year cliff). Why vesting matters: If a founder leaves early, they don't walk away with a full ownership stake in a company they barely contributed to. It ensures long-term commitment from all founders. Investors expect vesting—it's a standard term. Without vesting, a co-founder who quits after 6 months could own 25% of your company forever.

Roles and Responsibilities

Define each founder's role, responsibilities, and decision-making authority: Who is CEO, CTO, COO, etc.? What are each founder's primary duties and areas of ownership? How are major decisions made (unanimous, majority, CEO authority)? What happens if a founder isn't meeting responsibilities? Clear roles prevent overlap, confusion, and conflict over who's responsible for what.

Time Commitment

Clarify expectations around time commitment: Is this full-time or part-time for each founder? What happens if someone wants to keep their day job initially? Are there minimum hour requirements? Mismatched time commitments destroy startups. If one founder is full-time and another is part-time, address how that affects equity, decision-making, and expectations.

Intellectual Property Assignment

The company must own all intellectual property created by founders. Your agreement should include: Assignment of all IP created before and during the company's existence. Confirmation that founders have no conflicting IP obligations to prior employers. Agreement that any work product belongs to the company. Without clear IP assignment, ownership disputes can derail fundraising or acquisition opportunities.

Compensation and Expenses

How will founders be compensated? Are you taking salaries or deferring compensation? How are business expenses handled? Who can make purchases and within what limits? Document compensation expectations to avoid resentment when one founder draws a salary while others don't.

Decision-Making and Governance

How will major decisions be made? Define voting rights and decision-making processes: What requires unanimous founder approval? What can be decided by majority vote? What authority does the CEO have independently? How are tie-breaking situations resolved? Clear governance structures prevent deadlock and conflict.

Departure and Termination

What happens if a founder wants to leave or needs to be removed? Address: Voluntary departure process and equity treatment. Involuntary termination for cause (and how 'cause' is defined). Buyback rights for unvested equity. Non-compete and non-solicitation obligations post-departure. Having these terms in place before conflict arises makes difficult transitions smoother.

Dispute Resolution

How will you handle disagreements that can't be resolved internally? Options include: Mediation requirements before litigation. Binding arbitration clauses. Designated advisors or board members to help resolve disputes. Formal dispute resolution processes prevent costly litigation and preserve relationships.

Confidentiality and Non-Compete

Protect the company with: Confidentiality obligations preventing founders from disclosing company information. Non-compete provisions preventing founders from starting or joining competing businesses (typically limited in duration and scope). Non-solicitation clauses preventing departing founders from poaching employees or customers. These provisions should be reasonable and enforceable under applicable state law.

Founder Shares and Capitalization

Document the initial equity structure: How many shares does each founder receive? What type of shares (common, preferred)? What's the total number of authorized shares? How much equity is reserved for employee stock option pool? Having this clearly documented is essential for future fundraising and equity grants.

Amendment and Modification

Include provisions for how the agreement can be amended: Typically requires unanimous founder consent. Should be in writing and signed by all parties. May need board or shareholder approval depending on corporate structure. Flexibility to modify the agreement as the company evolves is important.

Common Mistakes to Avoid

Delaying the agreement until after launch or fundraising. Assuming 'we'll figure it out' is an acceptable approach. Creating overly simple agreements that don't address key scenarios. Copying templates without customizing for your specific situation. Not having legal counsel review the agreement. Failing to implement vesting schedules. Avoid these mistakes. A strong founder agreement is an investment in your company's future.

When to Create Your Founder Agreement

Ideally, before you incorporate. At the latest, before you start building the product, raising money, or hiring employees. The earlier, the better. Don't wait until you're facing problems to address them.

Working with Legal Counsel

While templates are a starting point, work with an experienced startup attorney to: Customize the agreement to your specific situation and state laws. Ensure all necessary provisions are included. Avoid unenforceable or problematic terms. Align the founder agreement with your corporate structure and other legal documents. The cost of legal counsel now is far less than the cost of founder disputes later.

Schedule a consultation and we'll draft a comprehensive founder agreement that protects all parties and sets your startup up for success.