Founders Agreement: What It Is, Why It Matters, and How to Create One

Starting a startup is always exciting. All the founders will feel great joy, fear, and excitement about the new adventure of solving a problem and building technology to solve it. 

At Startuplinks, however, we’ve seen many startups fail because of problems between founders. As a startup progresses, various situations may arise that put the relationship between you and your co-founders to the test. New commitments, moves, and career and professional opportunities will be some of the challenges you may face.

For that reason, and with the aim of giving you more tools to keep your startup from shutting down because of problems with your co-founders, Startuplinks and Zeta would like to introduce the “Founders Agreement,” which is sure to help you avoid many problems with your partners down the road..

What Is a Founders Agreement?

A Founders Agreement is a legal document that establishes how the company will operate, detailing roles, responsibilities, equity ownership, and other key aspects. It should not be confused with bylaws, an operating agreement, or a shareholders agreement, which focus on later stages or on shareholders’ rights in general.

Formalizing things from the start is crucial:

• Prevents equity dilution: If a co-founder or early employee leaves the company without proper provisions in place, you could be left with a “dead” percentage of your cap table (capitalization table) held by someone who no longer contributes, discouraging and delaying investment.
• Prevents intellectual property (IP) disputes: The technology developed is your company’s most important asset. Without an agreement, ownership of IP can vary legally from country to country, granting additional rights to co-authors and creating conflicts, especially if a CTO leaves the company.
• Attracts investors and demonstrates professionalism: Investors value startups with clear structures and formal agreements between founders, as this reduces risks and delays in the investment process.
• Clarifies roles and responsibilities: Defines who does what, making decision-making and day-to-day operations easier.
• Builds trust and prevents misunderstandings: Sets clear expectations from the start, helping prevent disputes.

Example: Startup Without a Founders Agreement

‍A real-world scenario without an agreement: Imagine a CTO leaves the company after 6 months without a vesting contract for their shares. That 25% of the company (for example) becomes a subjective point of negotiation, with the CTO valuing their time and the other founders valuing their sweat equity. This situation can become very complex, especially if the startup has already raised an investment round.

What Should a Founders Agreement Include?

To protect your startup, your agreement should cover the following points:

1. Ownership structure or equity split: How shares are distributed among the founders. Consider the value of who contributed the idea, leadership, and product, as well as when each founder joined the company (joining with an MVP is not the same as joining with just an idea). Consider exploring the idea of a dynamic cap table, as described in the book "Slicing the Pie."
2. Roles and responsibilities: Define each co-founder’s specific duties and level of commitment. It is important to clarify whether a majority shareholder can work part-time, as this may be viewed unfavorably by venture capital investors.
3. Initial Contributions: Detail what each founder contributed (full-time work, capital, an MVP, commercial contracts) and set expectations for their commitment to the project.
4. Vesting: The conditions under which founders earn rights to their shares over time. The industry standard is 4 years with a one-year cliff. The cliff is an initial period (generally one year) during which the founder does not acquire shares, giving the founders time to get to know one another in a work setting.
5. Intellectual Property (IP Assignment): Ensures that everything created belongs to the company, protecting its rights to technological developments.
6. Decision-making process: Establishes mechanisms for resolving disagreements and making key decisions. Define which decisions require consensus, which the CEO makes, and what happens if there is no agreement.
7. Exit clauses: Sets out the conditions under which a founder can leave the company and how their equity will be handled. Concepts such as “good leaver” (leaving on good terms) and “bad leaver” (leaving on bad terms), and the effect of each on the departing founder’s equity, should be agreed upon.
8. Additional clauses: These include Non-Disclosure Agreements (NDAs), non-compete clauses, exclusivity agreements for full-time founders, and procedures for handling conflicts.

When and How Should You Create a Founders Agreement?

The ideal time is before starting formal operations and definitely before seeking funding. Even if the company has not yet been legally incorporated, it is advisable to have a preliminary agreement that can be formalized later.

You have several options for creating one:

• Do it yourself: There are many online tools and resources. Platforms such as Y Combinator, Clerky, and Cooley Go offer resources to help you have these conversations and draft your own agreement.
• Legal review or advice: Consult a lawyer who specializes in startups to tailor the agreement to your team’s specific needs and jurisdiction. This is especially important if there is complex intellectual property, if you are in an investment round, or if you need mediation to reach agreements.

Best Practices for a Successful Founders Agreement

1. Talk everything through before signing: Any concern is valid and should be raised before making a commitment.
2. Run through scenarios: Think about future cap tables and possible early departures. A lawyer’s job is to anticipate problems—do the same yourselves!.
3. Put it in writing: Even if you are friends or have known each other for years, it is essential to put things in writing.
4. Review it annually: Relationships and commitments can change (e.g., someone goes from part-time to full-time), so it is important to review the agreement regularly.

Conclusion

A Founders Agreement is not just a piece of paper; it is the foundation of your startup’s trust and success. As Alberto Arrieta, CEO of Zeta: says, “It’s better to have these conversations when things are going well. When things go wrong, everyone will row toward their own demise”. Putting this document in place from the start will allow you to build a solid foundation for growth, attract investors, and avoid costly conflicts.