This article is for startup co-founders who are launching a company together and need to formalize their partnership before problems arise.
If you're wondering how to split equity fairly, protect against early departures, or avoid the conflicts that kill 65% of startups, this guide covers equity splits, vesting schedules, decision-making frameworks, and exit provisions that prevent costly co-founder disputes.
Key Takeaways
Sign your founder agreement within weeks of incorporation with four-year vesting and a one-year cliff to protect against early departures.
Document equity splits based on actual contributions rather than equal splits, considering capital, time commitment, expertise, and opportunity cost.
Require unanimous founder consent for major decisions like issuing equity, taking debt, selling the company, or changing business direction.
All founders must sign IP assignment agreements transferring ownership of past, present, and future intellectual property to the company.
Define good leaver and bad leaver provisions upfront to determine equity retention when founders exit voluntarily or involuntarily.
Why do I need a founder agreement if my co-founders and I trust each other?
Even with strong relationships, founder agreements prevent the costly disputes that cause 65% of startup failures. Written agreements force difficult conversations about equity, roles, and commitment before problems emerge, when discussions remain constructive rather than contentious.
Should we split equity equally among all founders?
Equal splits often prove problematic and create resentment when founders contribute unequally or circumstances change. You should consider unequal splits that reflect actual contributions like capital invested, time commitment, expertise, opportunity cost, and the criticality of each founder's role to initial success.
What is a vesting cliff and why does it matter?
A vesting cliff means founders receive no equity if they leave before one year, then receive 25% at the one-year mark. This protects your company from situations where a founder who leaves after just three months would otherwise own a significant percentage despite contributing minimally to company success.
What's the difference between good leaver and bad leaver provisions?
Good leavers who exit on mutual terms or for legitimate personal reasons typically retain their vested equity and may receive favorable terms on unvested portions. Bad leavers who engage in misconduct, breach duties, compete with the company, or abandon responsibilities typically forfeit unvested equity and may be required to sell vested equity back at cost or below market value.
Which decisions should require unanimous founder consent versus majority vote?
Unanimous consent should apply to major decisions like issuing new equity, taking on significant debt, selling the company, changing core business direction, or removing founders. Majority decisions can cover hiring senior employees, approving budgets, and significant contracts, while single founders handle day-to-day operational decisions within their domains.
Do I need to assign my intellectual property to the company even if I created it before incorporation?
Yes, every founder must sign IP assignment agreements transferring ownership of all past, present, and future IP related to the business. If you're bringing pre-existing IP, clearly document what's contributed versus retained and specify whether the company receives full ownership, exclusive license, or non-exclusive license.
When should we actually sign our founder agreement?
Sign your founder agreement as soon as possible after incorporating your company—generally within the first couple of weeks. Do not make the classic mistake of completing negotiations but failing to sign it at the last second, as you'll need to produce this agreement during investor due diligence.
What happens to my equity if the company gets acquired?
This depends on your acceleration provisions. Single-trigger acceleration vests your equity immediately upon sale regardless of whether you continue with the acquiring company, while double-trigger requires both the sale and your termination, protecting the acquirer's interests while ensuring you aren't trapped in an unfavorable post-acquisition role.
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