Founders’ Agreements: Get It in Writing
Most new ventures start the same way. Two or three people share an idea, some energy, and a big vision. A few coffees and casual chats later, they’re in business. At that point, it can feel awkward to talk about legal agreements. Everyone’s on the same page, things are exciting, and no one wants to slow things down with paperwork.
But as soon as money, pressure or growth enter the picture, the cracks appear. That shared understanding starts to shift. One founder feels they’re carrying more of the weight. Another wants out. The good vibes fade quickly, and what’s left is confusion about who owns what and what should happen next.
Why Verbal Agreements Don’t Work
Most early-stage business failures aren’t caused by the market or competition. They happen because the founders weren’t aligned from the beginning. Without a written agreement, people rely on memory, assumptions, and goodwill. Those things are fragile, especially when the business starts to get serious.
One common issue is that each founder has a different understanding of what was agreed. One person might think it’s a 50-50 split. Another might assume they’re earning equity over time because they’re putting in more hours. If nothing is written down, everyone tells themselves a different version of the story.
Over time, memories also change. That conversation about who does what and how much equity each person gets might have felt clear at the time. But six or twelve months later, especially when money or recognition is on the line, people remember things very differently.
Founders’ contributions can also shift. One person might go all in and work 80-hour weeks. Another might get pulled into other projects or lose interest. Without a clear framework that links effort to ownership, resentment builds quickly.
Even success can make things worse. Once the business starts growing, shares become valuable. If the arrangements weren’t clear from day one, you’re suddenly dealing with real financial stakes and no solid structure. This is where goodwill runs out and legal costs begin.
What Should Be in a Founders’ Agreement?
You don’t need pages of legal jargon. What you need is commercial clarity. The best founders’ agreements are practical, easy to understand, and tailored to the business and the people behind it. At a minimum, you should cover the following:
Equity and Capital
Start by setting out the initial share split and the reasoning behind it. If the equity is being earned over time or tied to results, that needs to be clear. You should also agree on what happens when more capital is needed in future. Will there be dilution? How will you treat sweat equity or non-cash contributions like intellectual property or networks? And how will you value those inputs?
Roles and Time Commitment
It’s important to be specific about who is responsible for what. Detail each founder’s role, decision-making authority, and time commitment. If someone is part-time or involved in other ventures, say so. Be clear about salaries, reimbursements, and what counts as acceptable performance. This avoids confusion later on.
Decision Making
Some decisions should require everyone’s agreement, such as raising capital, hiring key executives, or changing the company’s direction. Others can be handled by majority vote. You should also include a way to resolve deadlocks if the founders can’t agree. If you’re setting up a board, outline who sits on it and how voting works.
Exit and Buyout Terms
Founders rarely stay forever. Plan for exits early. Your agreement should explain what happens if a founder wants to leave or sell their shares. Do the other founders get first right to buy them? What happens if an external buyer comes in? Consider including tag-along or drag-along rights, and agree on how shares will be valued. Also define how you’ll treat founders who leave voluntarily versus those who are removed.
IP and Confidentiality
The business needs to own all relevant intellectual property, regardless of whether it was created before or after the agreement was signed. Make sure each founder agrees to assign any IP they develop. Include practical confidentiality terms to protect the business, and consider adding reasonable restrictions on competition or poaching clients and staff.
What Happens If You Skip It?
If you don’t put something in writing early, you’re leaving the business exposed. These are the common outcomes:
Operations stall while founders argue about strategy, spend or control
Resentment builds when one founder is doing the heavy lifting and another is coasting
Exit conversations get ugly because there’s no roadmap, just emotion
Investors walk away when they realise the governance is a mess
Disputes end up in court which costs real money and ruins relationships
Common Mistakes Even When You Have an Agreement
Even if you’ve got something written down, be careful of these common issues:
Equal splits that don’t reflect actual contributions or risk
No vesting terms, so someone can walk early and still hold equity
Overcomplicated share classes with unclear rights
Verbal promises or side arrangements that conflict with the written terms
Structures that look like no one trusts each other
Final Thoughts
A good founders’ agreement isn’t about limiting freedom or creating legal headaches. It’s about setting clear expectations so that everyone can focus on building the business without second-guessing every decision. It gives the team a common reference point and shows future investors that the business is well thought out.
The best time to put one in place is early, when everyone is aligned and optimistic. And if you’ve already started without one, that’s not a dealbreaker — but it’s something worth fixing now, before things get more complex.
This content is general information only and does not constitute legal advice. For advice specific to your situation, contact MWBL Consulting.