Before You Shake Hands: What a Founders’ Agreement Should Cover
Starting a business with a partner is exciting, and it is the best moment to agree on the hard questions. Here are the topics founders should settle in writing early.
Many businesses begin with two or three people, a shared idea and a handshake. That enthusiasm is valuable, and it is also the best possible moment to have difficult conversations. When everyone is optimistic and nothing is at stake yet, it is far easier to agree on how ownership, decisions and departures will work. Disputes between co-founders are a common reason young companies struggle, and many could have been prevented with clear written terms.
The details below are general topics to discuss. A business attorney can turn your agreement into the right documents for your entity type, whether that is an LLC operating agreement, a shareholders’ agreement or both.
Ownership and contributions
Start with who owns what and why. Founders contribute different things: money, time, ideas, relationships, technical skills or existing work. Equal splits are common because they feel fair, but they are not always the right answer. Discuss openly:
- What each person is contributing now and expected to contribute later.
- Whether anyone is working full time while others are part time.
- Who owns any intellectual property created before and after the company was formed, and confirming it is assigned to the company.
Vesting
Vesting means founders earn their ownership over time instead of receiving it all at once. A common structure spreads vesting over several years, often with an initial period before any shares vest. If a co-founder leaves early, unvested shares typically return to the company. Vesting protects everyone, including the founders who stay, and investors commonly expect it.
Roles and decision-making
Agree on who is responsible for what and how decisions get made. Which decisions can one founder make alone? Which require everyone’s agreement? What happens if founders with equal ownership deadlock? Spelling out titles, responsibilities and a tie-breaking process can save weeks of friction later.
Money and time
- When will founders start taking salaries, and how will amounts be set?
- How will additional money be raised if the business needs it, and what happens if one founder cannot contribute?
- Are founders allowed to work on other businesses at the same time?
When someone leaves
This is the conversation people avoid, and the one that matters most. Founders leave for many reasons: burnout, a new opportunity, family, illness, disagreement. Your agreement should address what happens to that person’s ownership, whether the company or other founders can buy back shares, how the price will be determined and what restrictions apply afterward. It should also consider what happens if a founder dies or becomes unable to work.
Finally, agree on how you will handle disputes, whether through mediation or another process, before you ever need it. Putting it all in writing is not a sign of distrust. It is a sign that you take the partnership seriously enough to protect it.
How to Have the Conversation
Knowing the topics is one thing. Talking through them honestly with people you like and trust can be harder. A little structure helps keep the discussion productive.
- Schedule it on purpose. Set aside a few hours away from daily work. Treat it as one of the most important meetings of the company’s life.
- Prepare individually first. Have each founder write down answers to the key questions before you meet. Comparing notes reveals differences that might otherwise stay hidden.
- Start with goals, not percentages. Ask what each person wants from the business in five years: income, growth, a sale, a lifestyle company, a legacy. Ownership terms make more sense once goals are clear.
- Discuss hard scenarios out loud. What if one of us wants out in a year? What if the business needs more money than we planned? What if we disagree about a major decision?
- Write a plain-language summary. Capture what you agreed on and where questions remain, then take it to an attorney to draft the formal documents.
Questions Every Co-Founder Should Answer
- How many hours per week can I realistically commit for the next two years?
- How long could I go without a salary?
- What would make me want to leave?
- Am I comfortable with someone else having the final say on certain decisions?
- What existing work, code, designs or relationships am I bringing, and am I willing to assign them to the company?
- How would I want to be treated if I had to step away for health or family reasons?
Common Mistakes to Avoid
- Waiting too long. Terms become harder to negotiate once the company has value or tension has started.
- Skipping vesting because everyone trusts each other. Vesting is not about trust. It protects the company from situations no one can predict.
- Leaving intellectual property unassigned. If a founder personally owns key work, the company may not truly own its own product.
- Vague roles. “We will figure it out together” often turns into confusion about who decides what.
- Using a generic template without advice. Templates can be a starting point, but they rarely fit every situation, entity type or state.
Tax and Paperwork Details Worth Raising
Some technical details carry real consequences if they are missed. In the United States, founders who receive stock that is subject to vesting are often advised to consider filing what is known as an 83(b) election with the IRS, which generally must be done within a short window after the stock is issued. Whether it makes sense depends on your circumstances. Ask your attorney and accountant about this and any other tax questions before shares are issued, not after.
It also helps to keep signed copies of all founder documents, board or member approvals and any later amendments in one secure place. Clean records make future fundraising, hiring and sale conversations far smoother.
Questions Founders Ask
Do we really need a lawyer if we agree on everything?
Agreement today is a good start. A lawyer helps translate it into enforceable documents and spots issues you may not have considered.
Can we change the agreement later?
Usually, yes, if the required parties agree. The documents themselves should explain how amendments work.
What if one founder is contributing money and another is contributing work?
That is common. Discuss whether money is treated as an investment, a loan or a contribution for ownership, and document it clearly.
How often should we revisit the agreement?
Review it whenever roles, ownership or funding change, and at least once a year as the company grows.
