Starting a business is exciting. However, before you begin developing your products or attracting customers, one crucial step can set the foundation for your success: creating a founders' agreement. This agreement can be simple at first and established even before you officially form a company, ensuring that everyone is aligned right from the beginning.

At WhatsLaw, we’re dedicated to helping entrepreneurs navigate the complexities of starting and growing a business. Whether you’re starting a family and friends venture or a broader entrepreneurial partnership, having a clear founders' agreement is essential for small business success.

Why you need a Founders Agreement

A founders' agreement is a legally binding contract that outlines the roles, responsibilities, and ownership stakes of each co-founder. It helps prevent misunderstandings and protects both the business and personal relationships between founders.

By setting up this agreement early, you define your working relationship and make sure all founders are clear about their roles and contributions. This is particularly helpful when starting a friends and family business, as it creates a formal understanding that protects personal relationships.

When should you create a Founders Agreement?

The best time to create a founders' agreement is before you officially launch your company or register it as a formal entity. The earlier you have this document in place, the better.

If you wait until after the business is running, you may already be in a position where disagreements arise, and it becomes harder to settle them amicably.

Key elements of a Founders Agreement

Even in its simplest form, a founders' agreement should cover several key points to provide clarity from day one. These elements can be expanded later as your business grows, but it's important to address them early to avoid future disputes.

1. Equity ownership

Who owns what? Decide how much of the business each founder will own, based on contributions like time, expertise, or capital. Clarifying ownership upfront helps avoid misunderstandings.

2. Roles and responsibilities

Clearly define each founder's role within the business. For example, one founder might oversee operations, while another handles marketing. This ensures accountability and helps keep your startup running smoothly.

3. Decision-making and voting rights

Disagreements are inevitable in any business. The founders' agreement should specify how decisions are made—whether by majority vote or unanimous agreement—and who has the final say on important issues, such as bringing on investors.

4. Vesting schedule

A vesting schedule ensures that founders earn their shares over time, encouraging long-term commitment to the business. This prevents a situation where one founder leaves early but retains a significant ownership stake, which could harm the business.

5. Exit strategy

If one founder decides to leave, how will their shares be handled? Your agreement should include an exit strategy, such as buying back shares or redistributing ownership. This keeps the business stable, even if one person steps away.

6. Intellectual property ownership

Establish who owns the intellectual property created while working on the business. Typically, the company will own the IP, but it’s important to define this clearly to avoid disputes in the future.

7. Non-compete and confidentiality clauses

These clauses protect your business from competitive threats by preventing founders from starting a competing company or disclosing sensitive business information during or after their involvement with the business.

The simplicity of early agreements

When you’re just starting out and haven’t yet formed a formal company, you don’t need a complicated legal document. A simple founders' agreement can still be incredibly effective. It can outline basic ownership, roles, and decision-making processes, allowing you to move forward with your business idea while ensuring everyone understands their place in the venture.

Later, as your business grows and you move toward formal incorporation, this initial agreement can be expanded into a more detailed contract that covers additional elements, like investor rights and company policies. By having a simple agreement from the beginning, you reduce the risk of conflict and ensure that your co-founders are aligned in both vision and commitment.

Common mistakes to avoid

When drafting a founders' agreement—whether simple or complex—there are a few common mistakes to avoid:

• Not consulting legal help: Even if your agreement is simple, it’s important to consult a lawyer to make sure it’s legally sound.

• Skipping the vesting schedule: Ensure the vesting schedule is in place to prevent a founder from leaving early and keeping a large ownership stake.

• Failing to update the agreement: As your business grows and changes, revisit and update the agreement to reflect new roles, responsibilities, or ownership stakes.

Final thoughts

A founders' agreement is essential, not just after forming a company but even in the early planning stages. It creates a solid foundation for your family and friends venture or other business partnerships.

At WhatsLaw, we know that starting a business can be both rewarding and complex. By creating a simple but effective founders' agreement early, you can avoid misunderstandings and build a path to small business success.

Sign up now to access our exclusive founders' agreement template and expert guidance — covering roles, ownership, and more to protect your venture’s future.