The short version
- A founders agreement has to settle five things: the equity split, decision rights and deadlock, intellectual property assignment, what happens to a departing founder's shares, and confidentiality and outside commitments.
- Founder IP assignment is the document most often missing at a first financing. Work done before the company existed belongs to the individual who did it, unless a signed assignment expressly reaches back and covers it.
- An even split between two founders is defensible. An even split with no tie-break is a company that cannot decide anything the two of them disagree about, and the remaining route is a court.
- Leaver terms decide what a departing founder keeps. The definitions do more work than the percentages, because how cause is defined is what determines whether shares are bought back at nominal value.
Why this document is only cheap once
Two people agreeing that a founder who leaves in month four should not keep a third of the company is an easy conversation, because neither of them plans to be that founder. The same conversation eighteen months later, with one founder visibly disengaged, is an accusation. Nothing about the clause has changed. Everything about the incentive to sign it has — and that runs clause by clause: roles are easy to divide before anyone is defending territory, and IP is easy to assign before it is worth anything.
An even split is a decision, not a default
The equity split is the clause founders are most reluctant to open and the one that determines the most. Contributions are almost never equal — one founder has been at it for a year, one is leaving a salaried job, one brings the customer relationships, one wrote the thing. Weighing those against each other is uncomfortable, and an even split is the fastest way to stop having the conversation.
Two ways to reach a split
Split it evenly
- Fast, and keeps the relationship symmetrical
- Honest where contributions are comparable
- Removes a recurring argument about ratios
Split it deliberately
- Prices the unpaid year someone already worked
- Reflects who takes the salary cut and who does not
- Forces the hard conversation while it is cheap
The ratio is rarely what fails. What fails is an even split chosen because neither founder wanted to open the subject.
Whatever number you land on, write the reasoning next to it and date it. Memories of why it was sixty-forty diverge remarkably fast, and the founder who feels short-changed in year two will reconstruct the conversation in their own favour, without any dishonesty at all.
The split is also where vesting has to be settled, because a percentage with no schedule attached is a percentage someone keeps in full on the way out. That is a separate mechanism with its own tax deadline, covered in founder vesting and what the cliff protects.
Who decides what, and what happens when two people disagree
Roles in a founders agreement are not job titles. They are decision rights: what each founder can do without asking, and what needs the other. Hiring, spending, signing a customer contract, changing pricing — assign each to a person or to a joint decision, and put a number on the thresholds. A short list of matters that always need both beats a long list of matters that need one.
Two founders, equal shares, and neither will move
Equal shares, and a decision the two of you disagree about
A tie-break is written down
A casting vote on operational matters, an agreed independent director, or a buy-out where one founder names a price and the other chooses to buy or sell at it.
Nothing is written down
No majority exists at board or shareholder level. The remaining route is a court: most corporate statutes let a holder in a deadlocked company seek a custodian or dissolution, on tests that vary by state.
None of those mechanisms is exotic, and all of them are easier to agree in the abstract than to invent during the argument they exist for. Deadlock sits alongside the other exit and dispute provisions in what belongs in a shareholder agreement.
The document most founders do not have
Ask a founder whether the company owns its own product and the answer is always yes. Ask whether each founder has signed an assignment of intellectual property to it, and the answer is frequently no, or nobody is sure. This is the most common gap at a first institutional financing, and it is a gap in the thing being bought.
The reason is timing. A company cannot own anything before it exists. Code written in the six months before incorporation, the brand a co-founder designed, the model someone trained at weekends — on the day of registration all of it belongs to the individuals who made it. It moves only by a written assignment that expressly covers work created beforehand.
Whether the company owns the work, in four squares
What has been signed
When the work was done
Before incorporation
After incorporation
Assignment on file
Owned, if the wording reaches back
An assignment covering only work from its effective date leaves the earlier material behind.
Owned by the company
A present-tense assignment of everything created in connection with the business. The clean position.
Nothing signed
Owned by the founder personally
The company did not exist and cannot have acquired anything. Worse still if that founder has already left.
Contested, and worse than it looks
Copyright in an employee's work may vest in the employer, but unpaid founders are often not employees — and patent rights never transfer automatically.
The consequence is rarely a lawsuit. It is delay and leverage: counsel finds the gap, closing waits on retrospective assignments from every founder and early contractor, and one of them now works for a competitor. The general rules are in who owns the work.
IP assignment agreement template
The present-tense assignment each founder signs, with wording that covers work created before the company was formed. Get one from every founder and early contractor, dated, in the week you incorporate.
What happens to a founder who leaves
Departure raises two questions and founders conflate them. Unvested shares are the vesting schedule doing its job. Vested shares are separate — unless the agreement says otherwise, the departing founder keeps them, votes them, and is on the cap table at exit. Leaver provisions change that: they classify the departure and attach a compulsory transfer to it.
| Category | Typically covers | What happens to vested shares |
|---|---|---|
| Good leaver | Death, serious illness, removal without cause, an agreed departure | Retained, or bought back at fair value on an agreed method |
| Bad leaver | Dismissal for cause, fraud or dishonesty, serious breach | Compulsory transfer, commonly at nominal value or the price paid |
| Intermediate leaver | Resignation inside a stated period, with no other trigger | Between the two, often on a sliding scale by length of service |
Two mechanical points matter as much as the drafting. A compulsory transfer needs a buyer, so name one — the company, the remaining founders, or an employee trust — and say where the money comes from. And agree the valuation method now, because on the day a founder leaves the two sides want opposite numbers from it.
Confidentiality, and what else each founder is doing
Founders sign non-disclosure agreements with suppliers and skip them with each other, which is the wrong way round. A departing founder leaves holding the customer list, the pricing model, the roadmap and the investor conversations. A clause saying plainly that this material is the company's costs a paragraph, and uses the structure of any mutual NDA.
Outside commitments are the more awkward conversation, and silence is what causes the damage. Three things belong in writing: what each founder is currently doing outside the company, how much time each will give the business, and the rule about starting anything new in the same field.
Disclose at signature, not at diligence
- Current employment, and whether that contract claims inventions made outside work.
- Consulting or freelance clients, and the hours they take.
- Other companies where the founder holds shares or a directorship.
- Any prior venture in a similar field, and whether it left IP or investor rights behind.
- Any non-compete or non-solicit carried over from a previous role.
The last two surprise people. A founder who left a large employer six months ago may carry restrictions the company has never seen, and an invention-assignment clause in that old contract can reach the work that became the product. Enforceability varies enormously between states and countries. Disclosure is not there to decide the question, only to stop the company learning of it from a diligence questionnaire.
Where the terms actually live afterwards
A founders agreement binds the people who signed it and nobody else — a real limit as soon as shares go to anyone new. Corporate bylaws, or articles of association outside the United States, bind every holder automatically on registration. So the arrangement ends up layered: transfer restrictions and leaver provisions migrate to the constitution or to a shareholders' agreement each new holder signs, IP assignments stay as standalone documents kept permanently, and the commercial understandings stay in the founders agreement.
The version that gets signed
The failure mode is almost never a bad founders agreement. It is a long one that was circulated, admired and never signed, while the company kept operating on an understanding. Four pages covering the split, decision thresholds, deadlock, an assignment from each founder and leaver definitions beats a thirty-page draft carrying three sets of comments. Sign the short version this month.
Sources
General information, not legal advice. This guide explains how these documents and rules generally work. Law varies by jurisdiction and changes, and none of it is applied to your circumstances here. For anything consequential, consult a licensed attorney where you are.
Frequently asked
Do we need a founders agreement if we already incorporated?
Incorporating creates the company and issues the shares. It does not settle who decides what, what happens if a founder leaves, or whether the company owns work done before it existed. Those are contractual questions, and the default answers are unhelpful: shares stay with whoever holds them, and pre-formation intellectual property stays with the individual. Signing after incorporation is normal and still worth doing.
Is a 50/50 split between two founders a mistake?
Not in itself. An even split is often an accurate description of two comparable contributions. The problem is an even split with no tie-break, because two equal holders who disagree produce no majority at board or shareholder level and the company simply stops deciding. Add a casting vote, an agreed independent director or a buy-out mechanism, and the split itself becomes unremarkable.
Does the company automatically own code a founder wrote before incorporation?
No. A company cannot acquire rights before it exists, so work created beforehand belongs to the individual who created it. It transfers only by a written assignment that expressly covers pre-formation material. An assignment drafted to catch only work from its effective date leaves the earlier material behind, which is exactly the gap investor counsel finds at a first financing.
What is the difference between a good leaver and a bad leaver?
They are contractual categories, not legal ones, and they mean whatever your agreement defines. Typically a good leaver departs through death, illness or removal without cause and keeps vested shares or is bought out at fair value. A bad leaver departs through dismissal for cause or serious breach and can be required to transfer shares at nominal value. The definition of cause decides which applies.
Can a founders agreement stop a founder working on something else?
It can require disclosure of outside commitments and a stated time commitment to the company, and both are ordinary. Restrictions on competing while still involved are usually enforceable as an aspect of the duty owed to the company. Restrictions continuing after departure are a different question, and their enforceability varies sharply — several US states will not enforce them against employees at all.