FOUNDERS AGREEMENT: The Startup's DNA (What Every Founder Needs to Know)
It feels like the start of an exciting journey to start a business with co-founders. You're full of ideas, making plans on product, and thinking about what you'll build together. But here's the truth that no one wants to hear: **most startup fights don't happen because of bad ideas; they happen because the founders never wrote down their relationship.**
A Founders Agreement isn't just another piece of paper to sign. It's the DNA of your startup, it tells you who does what, who owns what, and what to do when things go wrong (because let's face it, they do sometimes).
Let's go over everything you need to know about Founders Agreements: what they are, why they are important, and how to get one that really protects everyone.
What is a Founders Agreement, Exactly?
A Founders Agreement is like a prenup for your startup. It's a legal agreement between the co-founders that lays out the rules of engagement before you start building your business.
This paper talks about the little things that are hard to talk about when everyone is happy and excited. But believe me, talking about these things early on will save you a lot of money on legal fees, friendships, and businesses in the long run.
What a Good Founders Agreement Usually Has:
- The split of equity and the percentages of ownership
- Responsibilities and duties of each founder
- Voting rights and the power to make decisions
- Vesting plans for shares of the founder
- Owning intellectual property
- Pay and benefits structure
- What happens if someone wants to go
- Ways to settle disagreements
- Clauses about not competing and keeping secrets
Why Every Startup Should Have a Founders Agreement:
Even If You're Best Friends, this agreement is essential. I've seen too many good startups fail because the founders thought their friendship or verbal agreements were enough. Warning: they're not.
Here's why you need this paper:
- Clarity ends confusion: There won't be any "I thought you were handling that" arguments if everyone knows what they have to do and what they can expect. Investors want to see it. People will ask for your Founders Agreement before they write you a check. It shows that you mean business and are professional. No deal? A Warning sign. It keeps your ideas safe. If you don't have the right paperwork, the app that your technical co-founder made might legally belong to them, not the company. You don't want that to happen.
- Things happen in life: People get sick, move, or just lose interest. Your agreement spells out exactly what happens to their equity and role when they leave, whether they planned to or not. It keeps relationships going. Putting everything in writing, which is ironic, actually builds trust.
- Everyone feels safe and important: The Ministry of Corporate Affairs says that thousands of new businesses register in India every year, but a large number of them have problems with their founders within the first three years. Don't let yourself become a statistic.
Important Parts of Your Founders Agreement That You Can't Miss
The most important parts that make a Founders Agreement work:
- Distribution of Equity: This is usually the hardest talk to have. Should the equity be split evenly? Based on what you gave? On who came up with the idea first? The truth is, **“Equal splits (like 50-50 or 33-33-33)”** often cause problems because they don't show how much each person contributed or make it clear who has the power to make decisions.
- **Who's working full-time and who's working part-time?** **Who has technical skills, connections in the industry, or start-up money?** **Who's taking on more risk?** Write everything down clearly, and don't be afraid of unequal splits if they make sense for your situation.
- Vesting Plans: This is your protection against the co-founder who loses interest after three months but still owns 30% of your business. A standard vesting schedule has a one-year cliff and lasts four years. In other words, Founders get their shares over the course of four years. They get nothing if they leave before a year. They get 25% of their shares after one year. The rest will vest every month for the next three years. **It sounds mean, but it's fair. It keeps everyone on board.**
Roles and Duties
**Who is the CEO?** **Who is in charge of making new products?** **Who is in charge of the money? Write it down.**
Be clear about who has the power to make decisions:
**Do all decisions need to be made by everyone, or can some founders make decisions in their own areas?**
Assignment of Intellectual Property:
The company, not the individual founders, must own all code, designs, and content made for the startup. This clause makes sure that all IP is automatically given to the business. A lot of new businesses don't do this and then wish they had.
Exit Terms:
**What happens when a founder wants to leave?**
You need:
Buy-sell clauses that let the other founders buy the shares of the founder who is leaving. Ways to figure out the fair price. The company has the right of first refusal, so outsiders can't buy in without the company having first dibs. Good leaver and bad leaver clauses that tell the difference between someone leaving on good terms and someone being fired for bad behavior.
How to Make a Founders Agreement the Right Way
**Most founders make their biggest mistake here:** **they download a template from the web, fill it out, and think they're done.**
Don't do this:
Each startup is different. Your business model, industry, goals, and team dynamics are all different from those of other people. A generic template won't meet your needs exactly.
Do this instead:
Talk to each other honestly at first. Before getting lawyers involved, talk about all the hard things with your co-founders. What do you all expect? What are they afraid of? What happens if things go wrong?
Write down everything. Make notes while you talk. These will be the basis of your agreement.
Hire a lawyer who works with startups. You shouldn't cut corners here. A good lawyer who knows about startups will ask you questions you haven't thought of and keep you safe from problems you didn't know about.
Look over and change:
Your first draft won't be perfect. Take the time to go over, talk about, and improve things until everyone is really at ease.
Sign and store it correctly:
All founders should sign once everything is set, and they should keep copies in a safe place. Make changes to it as your business grows.
Common Pitfalls to Avoid:
- **Taking too long:** Before you officially start the business is the best time to make a Founders Agreement. **Right now is the second best time.**
- **Being too hopeful:** **"We trust each other completely"** is a great thing to say, but it's not a good way to win a case. Think about what could go wrong.
- **Not thinking about taxes:** The Income Tax Act says that different types of equity structures have different tax effects. Your deal should be good for taxes.
- **Not thinking about spouses:** If a founder gets divorced, their shares might be considered marital property. Talk about this in your agreement.
- **Making it too strict:** You need structure, but you should also be able to make changes as your business grows and things change.
How getlawyer.me can help you write the perfect agreement for founders
We understand. Legal papers can be scary, and you'd rather work on your product than worry about contracts.
That's where we come in. We help new businesses get their legal foundations right from the start at getlawyer.me. We know what it's like for early-stage companies because we've worked with hundreds of founders in a variety of fields.
This is how we do things differently:
- **We don't just give you a template.**
- **We meet with your founding team, talk about your vision, and write an agreement that fits your needs.**
- **We say everything in simple English.**
- **We plan ahead.**
- **We make it cheap**
We're here for you when you need us. We're here to help you change your agreement and deal with any legal problems that come up as your startup grows.
Your Founders Agreement isn't just there to protect you from the worst. It's also there to help you build the best base for success. When everyone is on the same page from the start, you can concentrate on what really matters: making something great.