What Is a Founders Agreement?
A founders agreement is a legal document created between the co-founders of a new business.
This agreement sets out the roles, responsibilities, and rights of each founder from the very beginning of your company.
The main purpose of a founders agreement is to clarify who owns what share of the business and how key decisions will be made.
It often addresses what happens if a founder decides to leave or if disputes arise between co-founders.
Typical points included in a founder agreement are:
- Equity split: How much of the company each founder owns
- Roles and duties: What responsibilities belong to each person
- Decision-making: How decisions are approved
- Intellectual property: Who owns creations and ideas
- Vesting schedules: When founders fully own their shares
- Conflict resolution: How disagreements are handled
An example might include a startup with two co-founders who agree that one will manage operations while the other leads product development.
Their founders agreement will detail their respective duties and outline what percentage of shares each will receive.
While not legally required, it’s highly recommended to put such an agreement in place before the company is formally set up.
This document serves as a clear record of your mutual understanding from the start.
When Is a Founders Agreement Needed?
You should consider a founders agreement as soon as you and your business partners decide to launch a startup or venture together.
This is especially important if you’re beginning to build a company, even before formal incorporation.
If you start working on an idea, share responsibilities, or invest time and resources together, a founders agreement becomes essential.
This applies whether you’re developing a minimum viable product, securing early customers, or preparing for fundraising.
Key moments when you need a founders agreement include:
- Before a significant financial investment by any founder
- When intellectual property is being created or shared
- Prior to negotiating with external investors during a fundraising round
- As entrepreneurs clarify roles and decision-making authority
- When business partners plan to formalise the venture or register the startup
Below is a simple table illustrating typical scenarios:
Stage
Is Agreement Needed?
Idea stage with co-founders
Yes
Developing product or service
Yes
Seeking or discussing investment
Yes
After incorporation
Still recommended
How to Write a Founders Agreement
Now you know why having a founders agreement in place is important, you’ll want to know how to write one. You can follow these steps (using a founders agreement template will be helpful).
Step 1: Start With a Clear Conversation Among Founders
Before drafting anything, the first and most important step is to sit down with all co-founders and have a detailed, honest conversation. This meeting should cover the company's vision, each person's expectations, roles, and commitment.
You should discuss uncomfortable but necessary topics, such as equity splits, decision-making authority, handling disputes, and exit scenarios. This step ensures that everyone is aligned before anything goes in writing.
Taking detailed notes from this conversation will form the backbone of your written agreement.
Step 2: Define the Company Structure and Founders’ Roles
Next, you should clearly define what kind of company you are forming, such as an LLC, corporation, or partnership, and specify that in the agreement.
Then, assign roles to each founder, stating who will be responsible for which part of the business. Roles can include CEO, CTO, CMO, and others, or functional areas such as operations, product development, or sales.
Be specific about responsibilities and how decisions related to those roles will be made. Write this section into the agreement to avoid confusion or overlap in the future.
Step 3: Decide on Equity Splits and Ownership Terms
Once roles are agreed upon, proceed to determining how the company's equity will be divided. Consider not only current involvement but also future contributions, risks, and any capital invested.
Be clear whether equity is split evenly or unevenly. Then, decide on vesting schedules to protect the company in case someone leaves early. Typically, equity vests over four years with a one-year cliff; however, you can tailor this vesting schedule to your specific needs.
Write out the exact number or percentage of shares each founder will hold, along with the vesting timeline.
Step 4: Address Intellectual Property and Confidentiality
At this stage, it's important to decide who owns any intellectual property created before and during the life of the company. Typically, all IP relevant to the business should be assigned to the company, rather than to individuals.
Include a clause where each founder agrees to assign any inventions, code, or content created for the business to the company. You should also include a confidentiality section that prevents founders from disclosing sensitive business information.
This protects the company in the long run.
Step 5: Outline Decision-Making and Voting Rights
Now, establish how decisions will be made within the company. Will some decisions require unanimous agreement, or will a majority vote suffice?
Define which types of decisions require each level of approval, for example, raising capital, hiring executives, or selling the company. Clarify whether voting rights are based on equity ownership or some other structure.
Spell all of this out in the agreement to ensure clarity and fairness.
Step 6: Plan for Conflict Resolution and Founder Departure
It’s crucial to prepare for potential conflicts or situations where a founder decides to leave. Create a process for resolving disputes, such as mediation followed by arbitration.
Decide what happens to a founder’s equity if they voluntarily leave, are terminated, or become incapacitated. This can include options to repurchase shares or allow them to keep vested equity.
Writing this section carefully will help avoid messy legal issues down the line.
Step 7: Include Financial and Operational Commitments
Clarify what each founder is expected to contribute in terms of time, money, or resources. This includes any capital investments, full-time work commitments, or specific deliverables.
Specify if any founder will be drawing a salary and, if so, how much and when. Clearly outline how operational expenses will be managed until the company begins generating revenue.
This helps ensure accountability among all parties.
Step 8: Set Rules for Future Fundraising and Equity Dilution
Include a section that explains how the company plans to raise future capital and what effect that will have on each founder’s equity.
Decide whether founders will have pre-emptive rights to invest in future rounds and whether dilution is proportional. Setting these expectations early can prevent disputes later when bringing in outside investors.
Step 9: Establish Exit Strategy and Dissolution Terms
Outline what will happen if the company is sold, acquired, or shut down. Include how proceeds will be distributed and who gets paid first.
Additionally, determine the necessary steps to officially dissolve the company, if required. This section is especially important for protecting everyone's financial interests and ensuring an orderly process if things don’t go as planned.
Step 10: Draft, Review, and Sign the Agreement
Once all these topics are discussed and agreed upon, begin drafting the document in plain, clear language. You can start from a free template or build your own from scratch using the notes and decisions from previous steps.
After the draft is complete, have each founder review it independently, ideally with the assistance of legal counsel. Once everyone agrees, each founder should sign the document, and copies should be stored in a secure and accessible location.
This final step makes the agreement legally binding and enforces the decisions made during the process. Using a founders agreement template for the UK will help throughout the process.
