Founders Agreement Template

In plain language: Identifies each co-founder by legal name, states their initial ownership percentage, and records the class of shares or units each holds.

Common mistake: Agreeing on a split verbally and leaving it out of the written document. Without a signed record, disputes default to each founder's recollection — which rarely match.

In plain language: Defines each founder's title, primary functional area, and expected minimum time commitment — full-time, part-time, or advisory.

Common mistake: Omitting minimum time commitments for part-time co-founders. A founder contributing 5 hours a week while holding 30% equity becomes a significant source of resentment and investor concern.

In plain language: Sets out the timeline over which each founder earns their equity, including the cliff period and the consequence of departure before or after the cliff.

Common mistake: Using the company incorporation date rather than each founder's actual start date as the vesting commencement date, which can leave a founder with unearned equity if roles were taken on at different times.

In plain language: Requires each founder to assign all prior and future work product, inventions, code, and IP related to the company's business to the company as a condition of their equity.

Common mistake: Failing to address prior IP a founder developed before the company was formed. Without a clear assignment of pre-existing IP, the founder — not the company — may own the core technology at incorporation.

In plain language: Prohibits each founder from disclosing or using the company's confidential information — business plans, financials, product roadmaps, and customer data — outside the scope of their role.

Common mistake: No definition of what constitutes 'Confidential Information.' An undefined term is an unenforceable term — courts require a reasonable boundary around what qualifies.

In plain language: Restricts founders from competing directly with the company or soliciting its employees and customers during their tenure and for a defined period after departure.

Common mistake: Using identical non-compete terms for all founders regardless of role. A founder with direct customer access warrants tighter restrictions than one focused purely on internal product development.

In plain language: Establishes the threshold required for ordinary and major decisions — simple majority, supermajority, or unanimous consent — and lists decisions that require board or all-founder approval.

Common mistake: Requiring unanimous consent for all decisions. In a two-founder company, unanimity on routine matters creates a deadlock mechanism that can paralyze operations over minor disagreements.

In plain language: Defines the process and price for repurchasing a departing founder's shares, including good-leaver and bad-leaver distinctions and the company's right of first refusal on any attempted transfer.

Common mistake: No buyout mechanism at all. Without one, a departing founder retains their equity indefinitely — creating dead equity, blocking investor due diligence, and leaving no clean path to dilute or remove a disengaged co-founder.

In plain language: Provides a structured process for resolving an impasse when equal co-founders cannot agree on a material decision — mediation, arbitration, or a buy-sell (shotgun) mechanism.

Common mistake: Omitting a deadlock clause entirely in a 50/50 split company. An equal split without a resolution mechanism means any disagreement can freeze the company indefinitely — a red flag for every institutional investor.

In plain language: Specifies which jurisdiction's law governs the agreement and how disputes are resolved — arbitration, mediation, or litigation — and in which venue.

Common mistake: Choosing a governing law with no connection to where the founders or company are based. Several states apply their own employment and IP laws regardless of the contract's choice-of-law clause.

A founders agreement is a legally binding contract between the co-founders of a startup that governs the core terms of their relationship: equity splits, roles, vesting schedules, IP ownership, confidentiality, non-compete restrictions, decision-making authority, and what happens when a founder leaves. It functions as the operating constitution of the founding team before formal corporate governance documents — like a shareholders agreement or operating agreement — are put in place.

A founders agreement should be signed before any founder contributes meaningful work, IP, or capital to the venture — ideally before or at incorporation. The longer you wait, the more leverage each founder accumulates and the harder the equity and role conversations become. Most startup lawyers recommend executing it within the first week of deciding to build together.

A founders agreement governs the founding team's relationship at the earliest stage — before outside investors or employees hold equity. A shareholders agreement is a broader document that governs all equity holders, including investors, and typically replaces or supplements the founders agreement after a priced funding round. The founders agreement is the early-stage precursor; the shareholders agreement is the post-investment successor.

Any company with two or more founders should have one. A solo founder has no co-founder relationship to govern, but the moment a second person joins with equity, a founders agreement is necessary. Without it, equity splits are undocumented, IP ownership is ambiguous, and there is no mechanism for removing or buying out a founder who leaves or stops contributing — issues that surface in every serious due diligence process.

There is no universally correct answer, but equal splits are the most common starting point for founding teams of two to three people with comparable contributions. Unequal splits are warranted when one founder contributed significant prior IP, capital, or a validated customer relationship. Whatever split is chosen, a vesting schedule is more important than the precise percentage — it ensures founders earn their equity over time rather than holding it passively after departure.

A cliff is a minimum period — typically 12 months — that must pass before any of a founder's equity vests. If the founder departs before the cliff, they forfeit the entire unvested grant. After the cliff, equity vests on a monthly or quarterly basis over the remaining vesting period. The cliff protects the company and remaining founders from a co-founder who leaves in the first year while retaining a significant equity stake.

A properly drafted and executed founders agreement is generally enforceable as a binding contract when it contains the elements required by contract law: offer, acceptance, and consideration (the mutual equity grants and obligations typically provide this). Specific clauses — particularly non-competes — vary significantly in enforceability by jurisdiction. In California, for example, post-employment non-competes are largely unenforceable regardless of what the contract states.

Under a standard founders agreement, unvested shares are subject to repurchase by the company at a price defined in the agreement — typically par value for a bad leaver (terminated for cause or violating the agreement) and fair market value for a good leaver (voluntary resignation or mutual departure). This mechanism prevents dead equity from accumulating on the cap table and keeps the departing founder from benefiting fully from work they did not complete.

For a straightforward two- or three-founder startup incorporating in a standard jurisdiction, a high-quality template is a strong starting point. Engage a startup lawyer when the equity split is unequal and contested, when a founder is contributing pre-existing IP with potential ownership complications, when any founder is based in a heavily regulated jurisdiction, or when the company is raising capital immediately after formation. A typical founders agreement review costs $500–$1,500.