Drafting a Founders’ Agreement

by Muhammad Bilal

What is a Founders’ Agreement?

Founders agreements are contracts that a partner presents to other founders for the pre-incorporation of a startup. It also defines the roles, responsibilities, and liabilities of each partner. They also assign IP rights among co-founders. A founder’s agreement is essential when demonstrating the seriousness of your startup.

Reasons to Have a Founders’ Agreement

Founders’ agreements serve as the bedrock of a new business formation. They set the tone and lay the groundwork for how you interact and manage the business as a team. While it’s unnecessary to utilize a founders’ agreement, drafting one ensures everyone is in a lockstep position on every critical legal and financial issue associated with the business.

Reasons to have a founders’ agreement includes:

Reason 1 . Establishes ownership roles and responsibilities

Reason 2 . Offers guidelines for dispute resolution

Reason 3 . Provides rules surrounding the contract’s termination

Reason 4 . Gives direction for handling a dissolution

Reason 5 . Protects minority shareholders

Reason 6 . Solidifies the seriousness of your business formation

Founders’ agreements are essential to a well-planned business venture when involving more than one person. They are also attractive investing tools since they signal to investors that you are organized and methodical, even when bootstrapping . Ensure that you have a founders’ agreement at the start of every new venture.

Essential Parts of a Founders’ Agreement

Like any contract, founders’ agreements contain standard provisions and guidelines. You will want to integrate them into your contracts to ensure that they are legal and comprehensive.

Essential parts of a founders’ agreement include:

Roles and responsibilities

Ownership structure

Co-founders as managers

Vesting schedules

Percentage of shares distribution

Voting rights

Capital contribution requirements


Contractual communication

Dispute resolution

Choice of law clause

Representations and warranties

Non-Competition Clause

Promissory notes

There are several essential facets that you will want to consider when creating a founders’ agreement. However, these agreements are designed to be thorough so that you won’t miss a single step in the planning process.

Things can move very quickly when you’re a startup. There are big decisions to be made every day, and it’s tempting to cut corners before the groundwork has been laid. There are so many practical issues to attend to as a new company that it’s easy to overlook the interpersonal matters. Decisions often lead to differing opinions, and differing opinions can lead to conflict. Fortunately, conflicts and communication disputes can be mitigated by drafting a founders’ agreement in the early startup stage.

What is a founders’ agreement?

Simply put, a founders’ agreement is a document — and once a company is far enough along, a legal one — that outlines all of the questions you need answered for your business in regards to ownership, roles, expectations and potential disputes. It is a contract of obligations for you and your business partners to ensure you are on the same page, addressing all of the "what ifs." Starting a business in many cases is just as serious and sometimes even more complex than marriage — so like a marriage, you want to make sure you are prepared and choose the right individual(s) to make your partner or partners. By setting aside the time to create a founders’ agreement, you can address all of the unknowns that may present issues further down the road. Better to address it out of the gate rather than down line when things get more complex. 

How to create your first draft

The key to writing a successful first draft is to keep it simple. It’s important to avoid overcomplicating the initial agreement because in the early stages of your company, you simply need to get on the same page as your partners. Rather than focus on the legal jargon and structure of the document, prioritize having the right questions and document responses in short answers from each party. 

Additionally, instead of using long-form sentences, stick to bullet points with one-to-two-line answers for each party. Not only will it make the agreement easy to read, address and understand, but it also helps people prioritize their answers. It also helps prepare for an easy transition when a legal team steps in to look at the document and make a more official version of the first draft. 

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