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Key takeaways
- A founders' agreement is a private contract that governs the relationship between co-founders. State corporate law establishes rules for share issuance and governance, but it does not address how co-founders make decisions, share responsibilities, or separate if the relationship breaks down.
- Founder shares are typically issued subject to a vesting schedule. The vesting terms must be documented in a Restricted Stock Purchase Agreement (RSPA) at the time of issuance, which also grants the company the right to repurchase unvested shares if the founder departs early.
- Under U.S. copyright law, IP vests in the individual creator by default. A founders' agreement must include an express IP assignment clause covering both pre-incorporation and post-incorporation work.
- Good leaver and bad leaver have no statutory definition under U.S. law. The equity consequence of a departure depends on what the founders' agreement says those terms mean. An agreement that uses them without defining them provides no resolution framework when a founder actually leaves.
- Without a dispute resolution clause, any unresolved disagreement between co-founders defaults to litigation. The agreement should specify the governing arbitration rules, the seat, and the mechanism for appointing arbitrators before a dispute arises.
A founders' agreement is a contract that governs the relationship between co-founders in a company, covering equity allocation, vesting schedules, roles, decision-making authority, IP assignment, confidentiality obligations, and departure terms.
Co-founder conflict is one of the leading causes of early startup failure. A founders' agreement does not prevent conflict, but it establishes an agreed structure that the founding team can work within when disagreements arise.
Why U.S. startups need a founders' agreement
State corporate law governs how companies are organized, governed, and dissolved in the United States. It establishes rules for share issuance, board composition, fiduciary duties, and stockholder rights. What it does not address is the relationship between co-founders. That gap is what the founders' agreement fills.
A shareholders' agreement also does not fill this gap. Once a VC has invested, the shareholders' agreement is primarily concerned with protecting the investor's rights. It does not govern how co-founders make decisions, how time commitments are shared, or what happens if one founder wants to leave early.
The founders' agreement records each founder's role, how decisions are made, how much time each founder commits, and what happens when founders cannot resolve a disagreement. It is the document that defines the founding team's operating framework before investors, employees, or lawyers become part of the picture.
Governing law and state selection
The founders' agreement is a private contract, and the law that governs it is typically the law of the state in which the company is incorporated.
The governing state law determines which provisions in the founders' agreement are enforceable. A provision valid under Delaware law may be rendered unenforceable if a California court determines California law applies. Founders should confirm the governing law of the agreement at the time of drafting, not after the first dispute arises.
Key clauses in a founders' agreement
Equity allocation
The founders' agreement records the split of shares issued between co-founders, specifying the number of shares issued to each founder and the price paid per share. That ownership split is not permanent. Every financing instrument the company issues after formation will dilute the founding percentages to some degree.
However, a founders' agreement can include provisions that grant founders the right to invest additional capital in subsequent financing rounds to preserve their ownership percentage. These provisions are commonly referred to as pro-rata rights, and the question of whether to include them is best addressed early, rather than during or after a financing round.
Founder vesting
A founders' agreement typically sets out the vesting framework agreed between co-founders, including the vesting schedule, cliff, and the company’s right to repurchase unvested shares.
However, these vesting and repurchase terms must also be documented in a Restricted Stock Purchase Agreement (RSPA) with the company at the time the shares are issued. The RSPA records the founder’s purchase of shares, applies the vesting schedule to those shares, and grants the company the right to repurchase any unvested shares if the founder departs.
Roles, decision-making, and at-will employment
The founders' agreement designates each co-founder's role, the authority that attaches to it, and the thresholds at which decisions require collective consent. Day-to-day decisions within a founder's domain can be made unilaterally, while reserved matters (decisions significant enough to require collective agreement before any single founder or board member can act) require the consent of the founding team.
A deadlock mechanism establishes what happens when founders cannot reach agreement on a reserved matter. Without one, a deadlock has no resolution path short of litigation or dissolution.
Founders who are also employees of the company are typically employed at-will under state law, meaning either the company or the founder can terminate the employment relationship without cause. The employment relationship and the equity relationship are legally distinct: a founder removed from their operating role without cause remains a stockholder, but their unvested shares remain subject to repurchase under the RSPA.
IP assignment
Under the Copyright Act, ownership of creative work vests in the individual creator by default. A company has no automatic claim to work created by its founders, even if created for the purpose of building the company.
The founders' agreement should include an IP assignment clause covering both post-incorporation work and any pre-incorporation IP related to the company's business. Where pre-incorporation IP exists, it should be documented and listed explicitly in the agreement.
Confidentiality and non-compete
The confidentiality obligation binds each founder not to disclose proprietary information, financial data, product roadmaps, or customer details during their involvement with the company and for a defined period after departure. Standard carve-outs apply for information already in the public domain, information independently developed by the founder, and disclosures required by law.
Non-compete clauses operate differently. The U.S. has no federal non-compete law, and enforceability is determined entirely by the state whose law governs the agreement. A non-compete clause that appears valid on paper may provide no protection depending on where the company is incorporated or where the departing founder operates.
California prohibits post-employment non-competes under Business and Professions Code Section 16600, making any such clause in a California-governed agreement unenforceable. Other states apply varying standards of reasonableness, with enforceability subject to fact-specific analysis. Founders should not treat a non-compete clause as reliable protection without confirming what the governing state's law actually permits.
Departure mechanics
The agreement defines what happens when a founder leaves before their vesting schedule is complete. The standard framework distinguishes good leavers from bad leavers, and the definitions must be explicit because neither term has a statutory definition under U.S. law. What each means is determined entirely by what the agreement says.
A good leaver is typically someone whose engagement ends due to death, permanent incapacity, or termination without cause. They retain their vested shares. A bad leaver is someone terminated for cause, who resigns without adequate notice, or who breaches the agreement. They forfeit unvested shares, and the agreement may grant the company the right to repurchase the vested shares at a price defined in the agreement.
An agreement that uses these terms without defining them provides no basis for resolution when a founder actually departs.
Dispute resolution
The founders' agreement should include a mechanism for resolving disputes between co-founders, both for general disagreements and specifically for deadlocks on reserved matters. The agreement should specify the governing arbitration rules, the seat, and how arbitrators are appointed.
Without a dispute resolution clause, any unresolved disagreement between co-founders defaults to litigation, which is slow, expensive, and typically damaging to the company regardless of outcome.
Founders' agreement template
This founders' agreement template covers the core clauses a founding team needs to document before or at incorporation. It is for illustrative purposes only. Parties should adapt it to their specific jurisdiction, transaction complexity, and any restrictions imposed by the company's governing documents.
FAQs on founders' agreements
How do you make a founders' agreement?
A founders' agreement has no prescribed format, but it must be executed in writing and signed by all parties to be enforceable. Using a template as a starting point is common practice, but the agreement should be reviewed and finalised with legal counsel before signing, since errors in the language around equity or IP can create structural problems that become expensive to fix during a financing round.
How much does a founders' agreement cost?
The cost depends on the complexity of the equity and IP terms and the experience of the attorney. Review of an existing agreement is generally less expensive than drafting from scratch. Engaging legal counsel at formation is also generally less expensive than correcting structural gaps during a financing round: an undefined IP assignment clause, for instance, can require a separate legal remediation process before an investor will proceed, adding cost and delaying the close.
Can a founders' agreement be amended after signing?
Yes, provided all parties consent to the amendment and the agreement sets out a clear amendment procedure. Founders should include an amendment clause that specifies the required consent threshold and the process for documenting changes. Amendments affecting equity terms may also require board approval.
Does a founders' agreement need to be notarized or filed with the state?
No. A founders' agreement is a private contract between co-founders and does not need to be notarized or filed with any state authority in the U.S. It becomes effective when signed by all parties, provided it meets the fundamental requirements of a valid contract. Statutory documents such as the certificate of incorporation are filed with the state.
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