Founders Agreement Checklist for Startups

What a founders agreement actually does

A founders agreement is a contract between the founders of a company that defines their rights and obligations toward each other and toward the company. It is distinct from the articles of association, which govern the company's relationship with the outside world and its shareholders generally.

The agreement answers the questions that cause most founder disputes: who owns what, who decides what, what happens if someone leaves, and who owns the work product. Putting these answers in writing at the start prevents ambiguity that becomes conflict later.

Equity, vesting and cliff

Equity allocation is the most sensitive topic. The agreement should state each founder's percentage, the class of shares, and — critically — whether the shares are subject to vesting. Vesting means equity is earned over time rather than granted immediately.

The most common structure is a four-year vesting schedule with a one-year cliff. Under this structure, a founder earns no equity during the first year; after the cliff, 25% vests, and the remainder vests monthly or quarterly over the remaining three years. If a founder leaves before the cliff, they receive no equity; if they leave after, they keep only what has vested.

Without vesting, the same departure would leave the departing founder with 50% of the company forever — an outcome that usually kills the venture. For a deeper treatment, see the Vesting and Cliff guide.

Roles, time commitment and expectations

The agreement should define each founder's role and their expected time commitment. Working full-time means something specific in a startup — it should be defined, including whether other projects or employment are permitted.

• Each founder's title and area of responsibility.
• Whether the commitment is full-time, and how that is defined.
• Whether outside employment or consulting is permitted.
• What happens if a founder reduces their commitment.
• How performance is measured and disputes about contribution are handled.

Defining roles early prevents the common conflict where two founders both believe they lead product, or where one founder feels the other is not contributing enough.

Decision-making and control

The agreement should specify how decisions are made: which decisions each founder can make alone, which require the other founder's consent, and which require a board or shareholder vote. Deadlock — a situation where founders disagree and neither can act — should have a resolution mechanism.

Common approaches include requiring unanimous consent for major decisions (issuing shares, selling the company, taking on debt, hiring key executives) while allowing each founder to act independently on day-to-day matters within their area.

IP assignment and confidentiality

Every founder should assign to the company all intellectual property created in connection with the venture — past, present and future. This clause is what ensures the company, rather than the individual founders, owns the product.

Confidentiality obligations prevent founders from sharing the company's know-how, plans and data with outsiders, both during the relationship and after departure. Non-compete clauses, where enforceable, prevent a departing founder from immediately starting a competing venture.

These clauses should be drafted carefully, as Israeli law places limits on the scope and duration of non-compete obligations. Read more in the Startup IP Checklist.

Departure: good leaver vs bad leaver

The agreement should distinguish between a founder who leaves under acceptable circumstances (good leaver) and one who leaves in breach of the agreement (bad leaver). The consequences for each should be defined.

• Good leaver: typically retains vested shares; unvested shares return to the company.
• Bad leaver: may be required to sell vested shares back, often at a discount.
• Definition of what constitutes good vs bad leaver (resignation, termination for cause, death, disability).
• Procedure and timeline for share repurchase on departure.

This distinction protects the company while remaining fair to founders who leave for legitimate reasons. Without it, any departure triggers the same uncertain outcome.

Transfer restrictions and right of first refusal

The agreement should restrict a founder's ability to transfer shares to outsiders. Without restrictions, a founder could sell shares to a competitor or an unwanted third party.

A right of first refusal gives the company or the other founders the right to buy the shares on the same terms before they can be sold to an outside buyer. Additional restrictions may prohibit transfers to competitors or require board approval for any transfer.

These clauses keep the shareholder base controlled and prevent unwanted parties from entering the company through a side transaction.

Dispute resolution and deadlock

Even with a good agreement, founders may disagree. The agreement should include a dispute resolution process — typically escalation to a senior advisor or mediator, followed by arbitration if needed — to avoid prolonged court proceedings.

A buy-sell or shotgun clause can resolve an irreparable deadlock by allowing one founder to buy the other out under defined terms. These mechanisms are easier to agree on while founders are aligned than during an active dispute.

If a dispute has already begun, the Founder Disputes service can help resolve it before it damages the company.