May 16, 2023

Founder agreements: what they are and why you need one

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When you start a company it’s easy to get caught up in the excitement and hustle… and to forget about one of the most important things you need to do after you register your company: sign a founders agreement. 

It’s essential to get a founders agreement in place as soon as you can to protect your company and outline the roles and obligations of each founder. In this article, we’ll cover what a founders agreement is, why you need one and what terms they include. 

What is a founders agreement?

A founders agreement is a legally binding document that defines the relationship between founders and the company. It establishes the framework for how your business will run and how decisions will be made. It should also include clauses that protect  the company’s IP and confidential information.

Important details you’ll find in a founders agreement include:

  • Roles and responsibilities of founders
  • Founders’ salaries
  • Founders’ equity compensation
  • Founders’ time off allowance 
  • Terms under which founders can/must leave the company
  • Transferral of IP ownership to the company

There are three ways to sign founder agreements:

  1. Each founder signs an individual agreement that specifies their role and responsibilities and a director also signs each founder agreement on behalf of the company
  2. All founders and a director sign a single agreement 
  3. All founders sign a single agreement, designed to solidify things between the founders before they've incorporated a company

There are two types of founders agreements:

  • Founders pledge - for idea stage companies when founders aren’t yet earning a salary and the company hasn’t raised funding yet
  • Founders service agreement - for founders who’ve started paying themselves a salary or who are about to do their first funding round - whichever comes first

The founders pledge is essentially a ‘lightweight’ version of the founders service agreement. 

Why do you need a founders agreement?

Founders agreements formalise the relationship between you and the company you have founded and make it clear what rights and obligations you have to your company - and what rights and obligations your company has to you. They map out how the company is run and what actions you can take if a co-founder isn’t acting in the company’s best interests. 

A founders agreement helps you:

  • Protect your equity in the company
  • Ensure that all founders receive the appropriate amount of compensation 
  • Outline the rights of each founder when it comes to decision-making and ownership
  • Prevent power struggles and miscommunication
  • Clearly outline when and how company funds can be used
  • Protect the financial interests of each founder and the company 
  • Define what happens to your shares and voting rights if you leave
  • Agree on who owns your startup’s IP
  • Know what to do if a co-founder acts against the company’s best interests 

Having a founders agreement in place shows that you're a well-organised business and prepared for challenges that may lie ahead. It also provides a sense of security and stability for the founding team, which can be helpful in the early stages of a startup. 

If you’re raising startup funding, investors will expect you to have a founders agreement. They’ll usually want to see your signed founders agreement as part of their due diligence. 

It’s a good idea to get a founders agreement in place as soon as you can after you register your company. 

What terms does a founders agreement include?

Below we’ve listed the basic terms a founders agreement usually includes. The specifics will vary depending on your needs and circumstances, and your agreement should be tailored to fit those specific needs. 

Remember that a founders pledge and a founders service agreement will include slightly different terms. A founders pledge will be less detailed and won’t include clauses about salary. 

Roles and responsibilities to the company
  • Define the founder’s role (ie CEO, CTO, COO, etc)
  • Cover day-to-day tasks (similar to what you’d find in an employment agreement)
  • Determine if co-founders are also directors of the company (and then define the obligations of each director)
  • Declare if there are external business interests that might conflict (such as a co-founder running another separate business)
Equity compensation and vesting
  • Lay out the share ownership structure
  • Define how shares vest for founders (often founder shares are allotted upfront but have to be earned over a period of years. If the founder leaves before that time they have to return their unearned equity). To understand more about this, you can read the article How founder vesting can save your startup’s life
Salary and working schedule
  • This only applies to a founders service agreement
  • Outline salary, holidays, sick leave and notice period
Founder restrictions
  • Define non-compete restrictions (ie whether the founders can start or work for a competing business)
Intellectual property, moral rights and non-infringement
  • Ensure that any IP created for the company belongs to the company 
  • Agree that anything created for the company is original and doesn’t infringe on copyright law
Confidential information
  • Agree to protect the company’s confidential information (this includes information such as trade secrets, client information, contracts, company procedures, etc). 
Data Protection
  • Agree to uphold the law of the Data Protection Act
Termination and resignation
  • Define the steps by which a founder will leave the company and the impact on their compensation 

How do you create a founders agreement?

You can get your lawyer to draft a founders agreement for you. If your company is in the UK or France, there’s a faster solution that won’t cost you anything. You can create a high-quality founders agreement for free and in a matter of minutes on SeedLegals. All you need to do is:

  • Start your 7-day free trial and sign in
  • Click ‘Team’ in the menu on the left-hand side
  • Click the ‘add team member’ button on the right
  • Follow the steps and your agreement will automatically generate in minutes
  • Share the agreement with your co-founders and e-sign it
  • Download the signed founders agreement

Want to create all the legal documents you need for your startup at a fraction of the cost compared to lawyers? Explore how SeedLegals can help.