Founders’ agreements are often compared to premarital agreements. No one gets married hoping or expecting to get divorced. In the days before the wedding, the couple fully expects not to ever get divorced.

But, in fact, 40% of marriages end in divorce. If the couple agrees to a premarital agreement before the marriage even begins, when they are working together cooperatively and acting in good faith, they can often create a fair plan for what to do if things fall apart. If the couple skips the premarital agreement, a divorce means negotiating division of assets and custody of children when the parties are not cooperating and are often acting in bad faith.

Though a co-founder relationship is not a marriage, it is similar to marriage in that it is a legal relationship entered into when the parties are cooperating, acting in good faith, and believe that the partnership will remain great forever.

It is estimated that 65% of startups fail due to co-founder disputes. If the co-founders agree to a founders’ agreement before the startup even begins, when they are working together cooperatively and acting in good faith, they can often create a fair plan for what to do if things fall apart. If the co-founders skip the founders’ agreement, a dispute means negotiating control of the company when the parties are not cooperating and are often acting in bad faith.

But here’s a difference from the marriage analogy: premarital agreements do not save marriages at risk of divorce. They are only a plan for what happens once divorce is inevitable. Founders’ agreements, on the other hand, can save start-ups that might otherwise be doomed by a co-founder dispute. This is because a good founders’ agreement sets expectations for key elements of the venture, such as who gets to make a decision when there are conflicting opinions, how founders get paid, how intellectual property is managed, and what happens if a founder wants or needs to leave early or go part-time.

Negotiating a legally-binding agreement between co-founders that determines, in advance, what will happen in a variety of situations where co-founder disputes often occur can be the difference between your startup failing or succeeding.

Recommended Mindset

Common, but not recommended: “How can I avoid getting screwed by my co-founder?”

Recommended: “We will eventually have disagreements. Based on our relationship and our individual strengths and weaknesses, how can we set up guidelines in advance to help ourselves make good decisions when the pressure is on?”

Founders Agreement Discussion Questions

What are the roles and responsibilities of each founder?

• Most startups benefit from having a single decision-maker at the top. Everyone wants autonomy over their own domain at work. Startup founders often have to wear a lot of hats and tackle tasks that don’t fit their precise skill set (at least, initially).

• Setting expectations for who gets to fill each role and how responsibilities will be divided up goes a long way toward establishing a healthy co-founder dynamic.

How much time will each founder allocate to the business?

• The answer could be full-time, part-time, part-time to start but then full-time after X milestone…

• The key is making sure everyone is on the same page. Note that investors are very hesitant to invest in companies with part-time founders. It often indicates a lack of commitment unless a roadmap to full-time is carefully planned and communicated.

How will you make decisions when you disagree?

• If you split voting power 50/50, you create a situation  where the default answer to any proposed new action is “no.” This is because  if Founder A proposes an action and Founder B says no, a 50-50 tie means you  do not have majority approval to take the action. This causes the death of  many startups.

• Investing tie-breaking decision power in one person is  often the most efficient way to resolve this question, but can create tension  in the other founder. Alternatives include a third-party mediator, a  tie-breaking board member, or unique vertical-based tiebreaking mechanics.

Will either founder contribute money to the business?

• It’s better to document cash contributions to the business up-front, so that it can be the investment basis for the initial founders’ shares. (The legal / tax logic gets wordy – just let us know if you would like to hear the details). Founders can fund their commitments over-time (it is not required to send the money to the company on Day 1).

Compensation structure. When will you pay yourselves? How will you set salaries?

• Founders often start out with no salaries, then modest salaries, and then more lifestyle-supporting salaries over time. Founders have different personal financial situations and lifestyle expectations – it helps to discuss these things ahead of time.

What are the long-term goals of the business?

This is often a question of whether you want to:

• Run the business as a profit-generating private company forever (this can make it more difficult to raise VC funding).

• Sell the business as quickly as possible.

• Sell the business for as large a profit as possible.

• Take the company public someday (still running the business, but unlocking liquidity for investors).

Will you ever sell the business? Under what circumstances?

• If your business is successful, you will have the opportunity to sell.

• Setting expectations for the scenario under which you would sell a successful company can help to avoid hard conversations when the opportunity arrives.

How do you envision splitting the proceeds of an exit?

• Exit proceeds following the division of equity.

• Founders often divide equity evenly (50/50 between two founders; 33/33/33 between three founders). But if one founder is expected to contribute more to the success of the venture than the others, it may be fair for that founder to receive more of the economic rewards. Disproportionate founder allocations are often not recommended, and investors dislike this approach as a recipe for trouble. Again, with a carefully planned rationale based on objective contributions, this can be mitigated.

What happens if a founder leaves early?

• If founders do not have vesting on their shares, Founder A can quit the business early and take their 50% with them. If Founder B turns the business into a success, Founder A will benefit from Founder B’s hard work (while having coasted in the meantime). Vesting protects founders from each other.  

• We recommend pre-emptively applying standard 4-year vesting (with a 1-year cliff) to your founders’ shares. This is because if you do not apply vesting from Day 1, investors will often require you to implement vesting later.

Under what circumstances can a founder be removed from the business?

Fraud, stealing from the business, committing crimes – these are obvious and do not need to be listed. We recommend discussing situations such as:

• A founder never transitions from part-time to full-time.

• A founder is not achieving X milestone.

• A founder never follows-through on a commitment to move to the location of the company HQ.

Should there be limits on the authority of either founder?

• This can address special circumstances. For example, if Founder A has decision-making authority for the company, but Founder B and Founder C are very averse to taking on a lot of debt, you can require unanimous consent of the founders to borrow money over a certain threshold.

• You don’t need to limit authority – many founders’ agreements do not include this section.

Next Steps

After you discuss the questions above, you can send us an email with the agreed-on terms. Don’t worry about making it formal or framing the agreement in legal terms – we will translate your ideas into binding legal concepts.

We will draft agreements that reflect your founders’ agreement. One document will literally be a Founders Agreement, which will contain many (or all) of the terms. We will also put your agreement into effect through other documents, including your Certificate of Incorporation and Organizational Board Consent (e.g., to document your equity split) and your Restricted Stock Purchase Agreements and Employee Invention Assignment and Confidentiality Agreements (e.g., to document your cash / IP contributions to the business in exchange for your equity, vesting, and confidentiality commitments).

Once the relevant agreements are drafted, we will send them over for your review (and we are always happy to walk you through the agrees on a call). We will tweak the documents based on your feedback, then send out for signatures.

From that point forward, ideally your founders agreement will serve as a guideline for how you interact as co-founders. In the event of a dispute, it can also be the legal basis of resolving the issue – hopefully, on terms that feel fair to all co-founders.

Let us know if you have any questions as you work through this process!