Documents · Glossary
What is a founders agreement?
A founders agreement is the document co founders sign early, often before a company exists, recording who does what, how equity is split, what happens if somebody leaves, and who owns the intellectual property created along the way. Once the company is incorporated a shareholders agreement usually takes over and covers the same ground more formally.
Almost every founder dispute traces back to a conversation that happened and was never written down. The agreement is cheap insurance against the version of your co founder you have not met yet.
Nuwan Madhusanka · Co-founder
6 min read · Published
| Founders agreement | Shareholders agreement | |
|---|---|---|
| Signed | Before or around incorporation | After the company exists, and updated on each raise |
| Parties | The founders as individuals | The shareholders, and usually the company |
| Covers | Roles, equity split, vesting, intellectual property, exit | Share transfers, board composition, reserved matters, drag and tag |
| Length | Five to fifteen pages | Twenty to sixty pages |
| Investors | Not a party | Usually a party once there are any |
| Replaced by | The shareholders agreement | A new version at the next round |
The split is the easy part, the vesting is not
Agreeing percentages takes an evening; agreeing what happens when one founder leaves in month seven takes an honest conversation nobody wants to have. Vesting is the mechanism that handles it: equity is earned over time rather than owned outright from day one, typically over four years with a twelve month cliff, so a founder who leaves early keeps little or nothing. Founders often resist this as a sign of distrust, which gets it backwards. Vesting protects the founders who stay from carrying a departed co founder's share for a decade, and it is the first thing an investor will ask for anyway. Write it before there is money on the table, because negotiating it afterwards is when it genuinely does feel like distrust.
Intellectual property has to be assigned, not assumed
Work done before incorporation belongs to the individual who did it unless it is assigned. That includes code, designs, brand names, domain registrations and customer lists built in the months before anybody thought about a company. A founders agreement should assign all of it to the company, or to the entity once formed, and each founder should confirm they are free to assign it, which is where prior employment contracts and university policies become relevant. This is the clause that stops a funding round eighteen months later, and it is also the clause that matters most if a founder leaves on bad terms holding the registrar login for the domain the business trades under.
Roles, time and the awkward questions
Write down what each founder is actually committing: full time, part time, or nights and weekends until a milestone. Unequal commitment with equal equity is the most common source of resentment, and it is much easier to address in a document than in a conversation six months in. Cover salary or the absence of it, expense reimbursement, and what happens if a founder takes outside work. Decision making needs a threshold: which decisions any founder can make alone, which need a majority, and which need everybody. Two founder companies should add a deadlock mechanism, because a fifty fifty split with no tiebreaker means a disagreement can stop the business entirely.
Leaving, and being asked to leave
The agreement should distinguish between a founder who resigns, one who is removed for cause, and one who cannot continue through illness or family circumstances. Each usually gets different treatment on vested equity, on any unvested portion, and on confidentiality and non solicitation obligations afterwards. Define cause narrowly and specifically, because a vague definition invites a fight at the worst possible moment. Add a buy back mechanism with a valuation method stated in advance, since agreeing a price after a relationship has broken down rarely works. None of this is pessimism. Companies that survive a founder departure almost always turn out to have written this section early.
Building the agreement as a document
A founders agreement is a numbered contract of five to fifteen pages, with schedules for the equity table and the vesting dates. Numbered structure suits it because clauses will be cited in later documents. Tables carry the cap table and the vesting schedule. One signature block party is one signer, so three founders means three parties, each with a name, email and signing order, and the company signs as a fourth party once it exists. At this length a cover is optional. Documents never print citations, so any reference to legislation is written into the body as content.
Keeping the document current
A founders agreement signed at the start and never reopened becomes misleading within a year, because roles change, one founder goes full time, another takes a salary, and somebody joins on founder style terms without founder paperwork. Set a review point tied to events rather than dates: incorporation, the first employee, the first outside money, and any change in a founder's commitment. Each review is short if the document was written clearly, and each one is a chance to catch a drift before it becomes a grievance. Record changes as a dated variation signed by everybody rather than by editing the original file, and keep the superseded versions. When investors arrive they will ask for the history, and a clean chain of signed documents makes diligence faster and cheaper than a single file with an unexplained edit date.
Questions people ask
Do we need one before the company is registered?
That is exactly when it helps most, because there is no company to hold the intellectual property or to enforce anything else. A pre incorporation agreement between the individuals can assign work to the company once formed and record the equity understanding. Registering first and agreeing later is the more common order and the more expensive one.
What if the equity split should not be equal?
Then it should not be equal, and the document is where the reasoning is recorded. Equal splits chosen to avoid an awkward conversation are the single most common early mistake. Differences in capital contributed, time committed, and what each founder brought to the start are all legitimate inputs, and writing down the reasoning makes the split easier to defend later.
Does a founders agreement replace a shareholders agreement?
No, it precedes it. Once the company is incorporated and especially once there are outside shareholders, a shareholders agreement covers the same ground plus share transfers, board composition and reserved matters. The founders agreement usually terminates or is expressly superseded at that point, and the document should say which.
What is a cliff?
A period at the start of a vesting schedule during which nothing vests, commonly twelve months. If a founder leaves before the cliff they keep no equity; on the cliff date a full year vests at once and the rest accrues monthly or quarterly. It exists so that a very short involvement does not result in a permanent stake.
Should advisors and early employees be covered?
Not in this document. Advisors take a separate advisor agreement with their own smaller vesting schedule, and employees are covered by employment contracts and an option plan. Folding them into the founders agreement makes it harder to amend and exposes founder level terms to people who do not need to see them.
Can we write it ourselves?
You can draft the substance yourselves, and doing so forces the conversations that matter. Have it reviewed before signing, particularly the vesting, intellectual property and leaver clauses, because those are the ones that are expensive to get wrong and nearly impossible to fix once a relationship has soured.
Make one with documents
The button opens the generator with this use case already described. Change the wording to match your own.
Create a document with OneCraftRelated questions
- What is an influencer agreement?An influencer agreement sets the deliverables, usage rights and disclosure duties between a brand and a creator. What the contract must cover in AU and US.
- Room rental agreement against a leaseA room rental agreement and a lease differ by whether the person is a tenant under tenancy law or a boarder. How to tell, by Australian state and in the UK.
- What is a term sheet?A term sheet sets out the terms of an investment before the long form documents are drafted. What each standard heading means and which parts actually bind.
Step by step in the builder: Create a document with AI, then Every document component and when to use it.
Written and checked by the OneCraft team. Last checked .