Founders’ Agreement Explanatory Note
While not all companies choose to have one, a Founders’ Agreement can be invaluable for early stage companies. The agreement will govern the early relationship between co-founders, with a focus on intellectual property (“IP”), responsibilities and ownership.
A Founders’ Agreement will typically contain a provision stating that IP created by the founders must vest with the company. In our example template document, the relevant clause obliges each founder to enter into an IP assignment (see here for an example of such a document). IP can be very valuable, so it’s important that all relevant IP belongs to the company from the start of the business.
The agreement will also include details of each founder’s role and responsibilities, as well as aspects of the business they are responsible for, such as business development. How detailed these roles are will usually depend on how advanced the company is and how set in stone the business plan is. Some companies like to leave some wiggle room to ensure they can easily pivot without amending the agreement, whereas others prefer to be as precise as they can while knowing they can amend the agreement through written consent in the future. Setting out the responsibilities in this way is not intended to replace an employment agreement — it instead sits alongside it with a high level overview of what each founder will be doing.
It’s common to see provisions relating to the ownership of the company set out in a Founders’ Agreement. At an early stage, the founders will together own all, or a large majority, of the shares in the company. The agreement will often set out the ownership as the date of the agreement.
These shares may be subject to reverse vesting provisions. This means that if a founder ceases to work with the company within a certain time period (commonly 4 years), a certain proportion of their shares will automatically become deferred shares, which carry no voting rights or meaningful economic benefit. This encourages founders to stay committed to the company. It should be noted that there is no obligation for the shares to be subject to reverse vesting — it’s an entirely optional provision.
Founders’ Agreements often sit alongside other similar agreements, such as employment contracts and shareholders’ agreements. It’s important to take these other agreements into consideration when drafting a Founders’ Agreement to ensure consistency between the clauses — for instance, if both the Founders’ Agreement and a shareholders’ agreement contain vesting provisions relating to the Founders’ shares, it's important to make sure that they are over the same number of shares and the same time period.
It’s important to note that the template founders’ agreement must be signed as a deed and therefore must be signed in the presence of an independent witness, who will also sign the document and provide their personal details. Witnesses must be 18+ years of age, not related to the signatory, and not involved in the matter at hand.
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