Starting a business with co-founders can be exciting, but even the strongest partnerships can face challenges. A well-drafted founders’ agreement helps prevent misunderstandings and protects your startup from internal disputes that can derail growth. Think of it as a prenuptial agreement for your business: no one wants to need it, but you’ll be glad it’s there if things go south.
Founders’ Contributions and Equity Split
At its core, a founders’ agreement outlines the roles, responsibilities, and expectations of each co-founder. It should clearly state what each person is contributing, whether it’s money, intellectual property, labor, or industry connections, and how much equity they receive in return.
Importantly, it should also define how that equity vests. Most startups include a vesting schedule (typically over four years with a one-year cliff) to ensure that founders who leave early don’t walk away with a large piece of the company.
Decision-Making and Governance
Decision-making is a critical aspect of any founders’ agreement, as it lays the groundwork for how the business will operate day-to-day and how it will respond to major strategic issues. Your agreement should clearly define how decisions will be made — whether by majority vote, unanimous consent, or through designated roles and responsibilities. For example, you may decide that routine operational decisions can be made by a majority of the founders, while significant decisions such as taking on new investors, approving budgets, or selling the company require unanimous agreement.
It’s also essential to outline the governance structure. Will the company be managed collectively by the founders (a member-managed LLC), or will it appoint officers or a board of directors (more common in corporations)? If you establish a board, you should specify how board members are selected, their voting rights, and term limits. In a more informal governance setup, you might assign roles such as CEO, CFO, or Head of Product to individual founders, each with decision-making authority in their domain.
Another crucial consideration is how to resolve disputes or deadlocks. If two or more founders have equal ownership and cannot agree on a critical issue, what’s the process? Common solutions include bringing in a neutral third-party advisor, using a rotating decision-maker model, or implementing a buy-sell agreement. Establishing these procedures early on can prevent disagreements from escalating and ensure smoother operations as the company grows.
Founder Compensation and Roles
Compensation terms should be defined as well. Will founders take a salary right away, or defer payment until the company is profitable? Are there performance expectations or metrics tied to continued involvement? Addressing these topics early creates transparency and helps avoid resentment.
For example, some startups choose to pay founders a modest salary during the early stages, while others defer all compensation until the business reaches a revenue milestone or secures outside funding.
Equity distribution should also be clarified — are shares granted upfront, or vested over time based on continued involvement and contribution?
It’s also helpful to outline specific roles and responsibilities: one founder might serve as CEO overseeing operations, another as CTO managing product development, and another as CMO handling marketing and outreach.
Handling Departures and Buyouts
You also need to plan for what happens when someone leaves. The agreement should include rules for voluntary and involuntary exits, including what happens to that founder’s equity. Will the company or other founders have the right to buy back shares? If so, at what price? Addressing exit scenarios upfront helps protect the business from future instability.
Confidentiality, IP, and Non-Compete Clauses
Finally, confidentiality, non-compete, and intellectual property clauses are essential. These provisions ensure that each founder’s contributions are properly assigned to the company and that no one can take the company’s ideas or client relationships and use them elsewhere.
Conclusion
Every startup is different, so there’s no one-size-fits-all founders’ agreement. But having a customized, lawyer-drafted agreement is one of the smartest moves you can make in the early days of your business. And it won’t just protect you legally, as it can strengthen your co-founder relationships by making sure everyone is aligned from the start.
If you’re launching a startup, contact Romano Law today to draft a founders’ agreement that supports your long-term success.
Contributions to this blog by Kennedy McKinney.
