Founders’ Agreements – A Beginner’s Overview

Getting a business off the ground successfully requires careful planning early on, especially when you’re working with multiple partners. This is why a founders’ agreement is crucial for organizing the responsibilities, roles, and ownership rights of your business’s founding team as it begins to take shape. Founders’ agreements aren’t as complicated as they sound and are an essential part of forming any startup or business.

Are you looking to launch a new business? There are some more early necessities to keep in mind when you’re just getting started. Thankfully, our Chief Product Officer, Gib Olander, covered Four Legal Essentials Every New Startup Needs to Know in his recent article for All Business to give you the best shot at success.

What is a founders’ agreement?

A founders’ agreement, sometimes called a co-founders’ agreement, is a legally-binding contract that formalizes the relationship between you and the people you partner with for your business. This agreement defines everything from equity splits (how ownership of the business is divided) to key responsibilities each co-founder commits to and is similar to other business legal documents that help maintain and govern your company.

You’ll draft or write your company’s founders’ agreement with the people you plan on starting your business with before you form your business. While there isn’t a formal structure or layout for a founders’ agreement, here’s what you should include in a founders’ agreement and the most important information you need to know to get started.

Information to include in your founders’ agreement

When drafting your founders’ agreement, the details you include should be able to easily resolve business disputes and also describe the business. This includes things like:

• Who the owners or founders are and their responsibilities
• Short description of the business and its objectives
• Process for selling the company
• What happens if a founder leaves the business (sometimes called an exit clause)
• How ownership of intellectual property (IP) developed by the company is determined

You can also cover things like the initial assets contributed to the business, like startup funds or how each member can expect to be compensated for their time, if at all.

Difference between founders’ agreements and shareholder agreements

While founders’ agreements are all about the rights, roles, and responsibilities of the founders’, shareholder agreements detail the rights and obligations of a company’s shareholders. Shareholder agreements are only drafted once the founders and partners agree to issue shares of stock. There is a third common legal business agreement called an operating agreement, but these are used solely for LLCs.

Once your business is ready to take flight, you’ll need experts there to guide the way. That’s where Northwest comes in. We’ve got you covered with everything from reliable registered agent service to regular state compliance filings. Our team is ready when you are.

The importance of a founders’ agreement

With a founders’ agreement in hand, your business is off to a good start before it is even formed. A founders’ agreement helps ensure sustainability by establishing clear decision-making processes, equity distribution, and contingency plans for unexpected challenges—like a founder leaving or a shift in business direction.

More than that, a founders’ agreement can help you:

• Attract investors: A clear ownership structure, defined roles, and a dispute resolution plan shows investors that your company is well-organized and capable of scaling.
• Ensure business stability: By setting up exit strategies, vesting schedules, and founder responsibilities, your business remains steady even if leadership changes.
• Avoid costly legal disputes: When disagreements arise, a well-documented agreement prevents drawn-out legal battles by providing predefined solutions.

By treating your founders’ agreement as a key operational tool, not just a legal formality, you can position your company for growth, easier fundraising, and long-term success.

Making a founders’ agreement legally binding

If all you and the other founders of your business have is a spoken or handshake agreement, that is not a legally binding founders’ agreement. To make a founders’ agreement an official contract that is legally binding, you’ll need to type or write it up and have all founders mentioned within the document sign. Don’t worry about getting it notarized, either, the signatures of the founders on the document is good enough.

What types of businesses need a founders’ agreement?

Corporations planning to have multiple directors or officers, partnerships, and multi-member LLCs are all entity types or businesses that benefit from drafting a founders’ agreement early on. As a general rule: if your business is founded by multiple partners with ownership stakes, it’s probably a good idea to draft a founders’ agreement.

The foundation of your business is key

If you want your business to last, a strong foundation is necessary. By providing a means of resolving potential disputes early on, and defining the rights of each founder, you can provide security and resilience to your business.