Most start-ups begin with a handshake. Two or three people share an idea, split the work and agree to “sort out the paperwork later”. Later rarely comes until something goes wrong, and by then it is much harder to agree on anything.
A founders’ agreement is a short, private contract between the people starting a company. It sets out who owns what, who does what, and what happens if someone leaves. Getting it in place early is one of the simplest ways to protect both the business and the friendships behind it.
Who owns what
The first question is how the shares are split. An equal split feels fair on day one, but it may not reflect who is putting in money, time or existing work. Writing down the reasons for the split now avoids difficult conversations when the company starts to grow in value.
Who does what
The agreement should say what each founder is expected to contribute, and whether they are working full-time or part-time. It can also cover who makes which decisions, and what happens if the founders cannot agree. A simple deadlock clause can stop a disagreement from freezing the whole business.
What happens if a founder leaves
This is the part most founders skip, and the part that matters most. Without clear terms, a co-founder who walks away after six months may keep a large share of the company. That can put off investors and leave the remaining founders doing the work for someone else’s benefit.
Most agreements deal with this through vesting, where founders earn their shares over time, usually three or four years. They also include leaver provisions, which set out what happens to a departing founder’s shares. These usually distinguish between a “good leaver”, such as someone leaving through illness, and a “bad leaver”, such as someone leaving to join a competitor.
Who owns the ideas
In the early days, code, designs and brand names are often created before the company even exists. If that work is not formally transferred to the company, it may still belong to the individual founder who created it. Investors will check this carefully, so the agreement should make clear that all intellectual property belongs to the company.
Founders’ agreements and the documents that follow
A founders’ agreement does not replace a company’s articles of association or a full shareholders’ agreement. The articles are a public document filed at Companies House, while a shareholders’ agreement is private and usually more detailed. For many early-stage companies, the founders’ agreement is the first step, and its terms are later carried into those documents when investors come on board.
The bottom line
A founders’ agreement takes far less time to agree at the start than a dispute takes to resolve later. It gives everyone clarity on what they have signed up to, and it shows investors that the business is built on solid ground.
If you are starting a company or bringing in a new co-founder, we can help you put the right agreement in place.