Founder agreements can only be drafted while the founders are still aligned
Hello, this is Legal Agent.
Startup legal work tends to focus on the contracts investors will actually see, such as fundraising documents, stock options and contractor agreements, and around Series A, investor-facing issues like the investment agreement, the shareholder agreement and IP ownership multiply fast. But there is one document I think founders should face much earlier: the founder agreement. It sounds like something drafted after co-founders have already fallen out, but in practice it is the opposite. It can only be written in realistic terms while the founders are still aligned, trust each other, and are moving in the same direction, because once that trust is gone, the same conversation becomes far harder.
It gets harder to discuss once the relationship sours
Raising "what if one of us leaves" or "should we buy back the shares" while things are going well can feel like an accusation, so founders put it off. But once a founder actually leaves, especially holding a meaningful stake, the founder staying on may resent someone no longer contributing keeping a large position, while the departing founder may feel entitled to keep what they earned by taking on early risk. Negotiating a buyout price for the first time at that point, with real value already visible in the company, turns what should be a business decision into an emotional one. A founder agreement is not a tool for cornering a co-founder later. It is a way to keep the company moving forward if someone's circumstances change, agreed while the relationship can still support a calm conversation about departure, illness, family circumstances or a serious breach.
Equity is compensation and control at the same time
Giving early equity to a founder taking on outsized risk for below-market pay is a natural instinct. But equity is not just compensation: it carries voting power and can affect fundraising, M&A and reorganization down the line. Under the Companies Act, shares are transferable by default, though startups typically restrict transfer in the articles of incorporation, requiring company approval; even so, the shares remain the founder's personal property, so removing them requires prior agreement and the correct Companies Act procedure, not just the residual goodwill of the other founders. Leaving this undefined creates real trouble if, say, a technical co-founder holding thirty percent leaves after six months over a disagreement in direction, with no prior agreement in place: the departing founder can remain a thirty-percent shareholder indefinitely, which weighs heavily on the remaining founder's ability to run the company, raise capital or design an option pool.
Departure share treatment gets scrutinized before fundraising
Investors care about founder equity because it signals whether the incentive structure that drives growth survives the round, not because they want to referee founder relationships. A departed founder holding a large stake, or no defined process for departure, tends to draw investor questions about how much stock is repurchased, by whom, at what price, and whether the reason for departure changes the outcome. A blanket "the company buys back everything" is not enough on its own, since a company buyback triggers Companies Act procedures and funding-source restrictions, so a founder agreement typically also allows for a sale to the other founders or a designated third party, and sets the price at a level that will not raise tax, accounting or fairness concerns between the parties. Whether a serious breach, competing activity or misappropriation of confidential information should be treated differently from an amicable departure due to illness or a difference in direction is worth deciding in advance, not case by case after the fact. A transfer restriction in the articles prevents an unwanted third party from becoming a shareholder, but does nothing to resolve what happens to a departing founder's own shares, which is exactly the gap a founder agreement fills.
Forced-sale clauses need careful, specific design
A clause requiring a founder to sell their shares in defined circumstances, such as departure while still holding a large stake, a serious breach, launching a competing company, or misappropriating confidential information, has real value for the remaining team, but it reaches directly into personal property, so vague triggers or pricing invite disputes later. In practice this means specifying the triggering events, who may demand the sale, whether all or only part of the holding is covered, how price is set, and when payment is due, sometimes varying the price by the reason for departure. The design should be something the company can explain to an investor without looking either unfairly restrictive of founders or entirely silent on founder equity risk.
Non-compete, confidentiality and representations deserve founder-specific treatment
Founders know more about the product roadmap, pricing strategy, fundraising status and business weaknesses than almost anyone else, so a competing venture after departure carries real risk. A non-compete still touches a founder's own freedom to work, though, so its duration, geographic scope and covered business need to be defined narrowly rather than borrowed wholesale from an employee template, especially since a startup's business area tends to expand well beyond what it covered at founding. The same care applies to confidentiality obligations and to representations confirming that a founder is not bringing in code or materials that belong to a former employer, and that any competing outside activity has been disclosed. This is not because founders distrust each other, but because these are exactly the points that surface in fundraising diligence if left unaddressed.
Decision-making rules keep the company from stalling
A fifty-fifty split between two founders looks clean while the relationship is good, but a disagreement over a new share issuance, a key hire or an M&A can leave the company unable to move at all. Separating routine execution from matters that require agreement among the founders, and deciding whether unanimity or a defined majority governs the latter, matters more as headcount and decision velocity increase. It is worth keeping in mind that a founder agreement is an internal understanding among the founders, not a substitute for the shareholders' meeting or board resolutions the Companies Act itself requires.
Align it with the investment agreements to come
A founder agreement drafted early should anticipate the investment and shareholder agreements likely to follow at Series A, since terms placed too rigidly beforehand, such as restricting a departing founder's share sale to co-founders only, can conflict with a future investor's right of first refusal or co-sale rights. This does not argue against drafting one early; having a founders' own position already on paper makes it far easier to explain that position to an investor later, rather than negotiating it for the first time under fundraising time pressure.
Do not just fill in a template
Founder agreement templates are easy to find, but few contracts vary as much by company as this one. The number of founders, how equity is split between a technical and a business co-founder, whether shares are already issued, where buyback funds would come from, and when outside investors are expected all change what the agreement should say. It is worth starting from the company's actual situation and adjusting a template to fit, not the other way around.