Starting a business feels like getting married. You are excited. You trust your partner. You see a bright future. But as a lawyer who spent four years as a paralegal before passing the bar, I have seen the messy side of things. I have organized the paperwork for lawsuits between best friends who started companies together. It is ugly. It is expensive. And it is entirely preventable.
You need a Founder’s Agreement.
Many new entrepreneurs skip this step. They think a handshake is enough. They think legal documents are for “later” when they have money. That is a mistake. A Founder’s Agreement is not just a contract. It is the rulebook for your relationship. It protects your hard work if things go wrong.
This guide will walk you through exactly what goes into this agreement. We will cover how to split equity, how to handle decision-making, and what happens if someone quits.
Why You Cannot Skip This Document
I worked on a case during my time as a paralegal that sticks with me. Two friends started a tech company. One was the technical genius. The other was the sales guy. They split the company 50/50 on day one.
Six months later, the sales guy got bored. He stopped working but kept his 50% ownership. The technical guy did all the work for the next three years. When they finally sold the company for millions, the sales guy who had been surfing in Bali for years walked away with half the money.
The technical founder was furious. But legally? He could not do anything. They had no agreement. They had no “vesting” schedule.
A written agreement stops this from happening. It answers the hard questions while you are still friends.
The Core Parts of a Founder’s Agreement
You do not need a forty-page document full of Latin words. You need a clear agreement that covers the basics. Here are the essential sections you must include.
1. Roles and Responsibilities
Who does what? This sounds simple. It is not.
In the early days, everyone does everything. But you need to define the primary lane for each person. If both of you think you are the CEO, you will have conflict.
What to include:
- Job Titles: Who is the CEO? Who is the CTO?
- Daily Duties: Be specific. One person handles product development. The other handles marketing and fundraising.
- Time Commitment: Is this a full-time job? Is it a side hustle? If one person works 60 hours a week and the other works 10, that creates resentment. Write down the expected hours.
2. The Equity Split (Who Owns What?)
This is the number one question I get. “Should we split it 50/50?”
Usually, the answer is no.
A 50/50 split causes gridlock. If you disagree, nothing happens. The business freezes. You need a way to break ties.
When you decide on the split, look at contributions, not just current value.
- Money: Who put in the cash to start?
- Idea: Who came up with the core concept?
- Labor: Who will build the actual product?
- Risk: Is someone quitting a high-paying job to do this?
Semantic SEO Tip: Search engines look for “startup equity calculator” concepts here. Think about future value, not just past work.
3. Vesting Schedules (The Safety Net)
This is the most critical technical term you need to know.
Vesting means you earn your shares over time. You do not get 100% of your equity on day one. You have to stay with the company to keep it.
The Standard Schedule: The industry standard is “four-year vesting with a one-year cliff.”
- The Cliff: If a founder leaves within the first year (12 months), they get nothing. Zero shares. This protects the company from people who flake out early.
- The Vesting: After the first year, they get 25% of their shares. Then, they earn the rest in small chunks every month for the next three years.
If you do not have vesting, you risk “dead equity.” That is when someone owns a huge chunk of your company but does not work there. No investor will give you money if 40% of your company is owned by a guy who quit two years ago.
4. Intellectual Property (IP) Assignment
This section is non-negotiable.
When you write code, design a logo, or write a business plan, you own that work. The company does not own it.
You must sign a document that says, “Everything I create for this business belongs to the company, not to me personally.”
Without this, a disgruntled founder can leave and say, “I built that website code. You cannot use it anymore.” That kills the company instantly.
5. Decision Making and Gridlock
What happens when you disagree?
If you have three founders, you can vote. 2-against-1 wins. If you have two founders with equal power, you have a problem.
Common Solutions:
- The CEO Decides: You agree that on specific operational issues, the CEO has the final say.
- Outside Advisor: You pick a neutral third party (like a mentor or industry expert) to cast a tie-breaking vote.
- Supermajority: Major decisions (like selling the company or taking on debt) require 75% approval, forcing you to agree.
6. Departure and Dissolution (The Pre-nup)
Nobody wants to talk about the end. You must do it anyway.
- Voluntary Departure: What if someone wants to quit? Do they have to sell their shares back? Usually, the answer should be yes. The company needs those shares to hire a replacement.
- Forced Removal: Can you fire a founder? If they steal money or stop working, you need a legal way to remove them.
- Death or Disability: If a founder dies, their shares usually go to their spouse. Do you want to run your tech startup with your partner’s husband? Probably not. You need a clause that lets the company buy those shares back.
The Founder’s Agreement Template Structure
Below is a simplified text structure you can use to draft your agreement. Note: I am a lawyer, but I am not your lawyer. This is for educational purposes. Always have a local attorney review final contracts.
Section 1: Company Details
- Company Name: [Insert Name]
- State of Incorporation: [e.g., Delaware]
- Effective Date: [Date]
Section 2: The Founders
- Founder A: [Name]
- Founder B: [Name]
Section 3: Ownership Structure
- Founder A Equity: [XX]%
- Founder B Equity: [XX]%
- Total Authorized Shares: [Number]
Section 4: Vesting Terms
“Founders agree that their shares are subject to a vesting schedule. 100% of the shares shall vest over a period of four (4) years. A one-year cliff applies. If a Founder leaves before one year of service, all shares are forfeited.”
Section 5: Intellectual Property
“Each Founder agrees that any work, inventions, ideas, or code created during their engagement with the Company belongs solely to the Company. Founders hereby assign all rights to the Company.”
Section 6: Transfer Restrictions
“Founders cannot sell, transfer, or give away their shares to any third party without the written consent of the other Founders. The Company has the ‘Right of First Refusal’ to buy back any shares a Founder wishes to sell.”
Section 7: Resignation and Removal
“If a Founder ceases to work for the Company, the Company has the right to repurchase any unvested shares at the original purchase price (usually $0.0001 per share).”
The “Section 83(b) Election” Warning
I have seen this mistake cost founders hundreds of thousands of dollars in taxes.
When you get shares in a startup, the IRS might view those shares as income. If you have a vesting schedule (which you should), you have a tax problem.
As your shares “vest” over time, they might gain value. If your company becomes valuable in year three, you might owe taxes on that value before you ever sell the stock.
The Fix: You file a document called an 83(b) Election with the IRS. You must file this within 30 days of getting your shares. Not 31 days. 30 days.
This form tells the IRS: “Tax me on the value of my shares right now (which is basically zero).” This locks in your tax basis. If you miss this deadline, there is no fix. Mark your calendar.
Final Advice from the Trenches
Writing this document feels awkward. You are sitting across from your friend discussing “what if you get fired.” It kills the vibe. Also read: Eviction Notice (Notice to Quit) – Free Legal Template for 2025
Do it anyway.
I suggest scheduling a specific “business meeting” to handle this. Do not do it over beers. Do not do it via text. Sit down with a laptop and go through these points.
- Be Honest: If you want to be the CEO, say it now.
- Be Fair: Don’t try to trick your partner. If the deal isn’t fair, they will resent you later.
- Sign It: An email chain is not a contract. Print it. Sign it. Save it.
A Founder’s Agreement is the foundation of your company. Build it on solid ground, not quicksand. If you take the time to do this right, you can focus on what really matters: building a great business. Follow me on LinkedIn for more updates!
