Founder's Agreement

What is a Founder's Agreement?

A founder’s agreement is a legal document that outlines the rights, responsibilities, ownership stakes, and obligations of each founder in a startup venture. It’s one of the first contracts entrepreneurs should consider drafting when launching a business with co-founders. By clearly defining roles and expectations from the outset, a founder’s agreement helps reduce the potential for disputes and ensures smoother collaboration as the company grows.

Startups, particularly in fast-moving industries such as technology, e-commerce, and media, benefit immensely from this kind of clarity. Miscommunication about equity splits, decision-making authority, or the handling of founder departures can derail a promising venture. A well-drafted founder’s agreement serves as a proactive step to protect the interests of both the business and its creators.

Key Components of a Founder's Agreement

While the format and details of founder's agreements may vary, most include several foundational components. These elements help ensure that all partners are aligned on the business’s core expectations and future plans.

Equity Ownership
This section outlines how much equity each founder holds and whether there are any initial capital contributions. It's important to differentiate between initial ownership and vesting schedules, which determine how ownership becomes official over time. You should anticipate founder dilution as new capital is obtained for the business.
Roles and Responsibilities
Founders should clearly define who is responsible for what. For instance, one founder may handle marketing and operations while another manages technology and development. This section avoids duplication of work and ensures accountability.
Decision-Making and Voting Rights
The agreement should include how decisions will be made—whether by majority vote, unanimous consent, or designated authority. It may also distinguish between day-to-day management decisions and those that require a higher level of approval, such as for sale of the company..
Vesting Schedule
Vesting schedules prevent co-founders from leaving early with a significant portion of company equity. A common approach is a four-year vesting schedule with a one-year cliff. This ensures that equity is earned over time and aligned with the ongoing contribution to the startup.

Transfer of Stock Restrictions.

Rights of first refusal and other potential restrictions on transfer.

Founder Departures and Exit Scenarios

A founder’s exit—whether voluntary or involuntary—can be one of the most disruptive events for a startup. The founder’s agreement should prepare for this by including procedures for how to handle these situations.

If a founder leaves early, the agreement might include a buyback clause that allows the remaining founders or the company to repurchase vested shares. It can also outline how the departing founder’s responsibilities will be reassigned. For acquisitions or dissolutions, clauses can address how any proceeds will be distributed.

Startups that neglect these clauses often find themselves unprepared during challenging transitions. The agreement functions as a guide, providing clarity on what to do and helping the remaining founders stay focused on the business.

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Intellectual Property (IP) and Confidentiality

Startups often revolve around proprietary ideas, software, or other forms of intellectual property. Clarifying ownership of IP is essential—especially if founders are developing code, content, or designs individually.

A well-crafted founder’s agreement includes clauses that state all IP developed by the founders for the business is owned by the company. It also typically includes non-disclosure provisions to ensure founders do not reveal sensitive business information to outside parties. These clauses are foundational to protecting a business’s long-term interests and increasing its attractiveness to investors.

Compensation and Time Commitment

Another aspect that can lead to conflict is compensation—both in terms of salaries and benefits. Early-stage companies may not be able to offer significant pay, but it’s still important to outline expectations.

A founder’s agreement can specify whether founders are entitled to salaries, and under what conditions those salaries will begin or increase. It can also clarify time commitments. For instance, will all founders work full-time from the beginning, or will some contribute part-time? Addressing these questions early helps avoid misunderstandings about each founder's level of involvement.

Dispute Resolution and Amendments

Even with careful planning, disagreements are bound to arise. The founder’s agreement should include a plan for resolving disputes. This might involve mediation or arbitration rather than immediately resorting to litigation, which can be time-consuming and expensive.

This section can also explain how the agreement itself may be amended. As the business grows and evolves, it's likely that changes will need to be made. Establishing a straightforward process for modifying the agreement helps keep it relevant and enforceable.

Arbitration is often preferred over litigation.

Summary of a Founder's Agreement

A founder’s agreement is far more than a handshake or informal email exchange. It is a structured document that brings clarity, trust, and a shared sense of commitment to the founding team. While no agreement can anticipate every potential outcome, having one in place is a strategic and legal safeguard.

The benefits of a founder’s agreement go beyond legal protection—it supports healthy collaboration and investor confidence. Investors from firms like Accel, Kleiner Perkins, or Benchmark are far more likely to invest in startups that show signs of being well-governed from the start. A founder’s agreement demonstrates that the team takes governance seriously.

Typical Elements of a Founder’s Agreement Include:

Names and roles of all founders
Initial capital contributions
Equity splits and vesting schedules
IP assignment and confidentiality clauses
Compensation and time commitment expectations
Voting rights and decision-making processes
Founder exit strategies and buyback clauses
Dispute resolution mechanisms
Rules for amendments and modifications

By defining these terms upfront, founders reduce ambiguity and set the stage for smoother growth. As with any legal document, it’s advisable to consult an attorney when creating a founder’s agreement to ensure the language is clear and enforceable under local laws.

For more in-depth information, see What to Include in Your Startup’s Co-Founder Agreement.

Definition of Founder's Agreement