Founders' agreement: the six things to agree before you build anything

The split is the easy part to write and the hard part to agree. Equal thirds feel fair on day one; they feel less fair two years later when one founder has worked full time and another has kept a job. Write down the split and the reasons for it (idea, capital, time, skills) so that if it is revisited, it is revisited against something.

Decide the share class too. Early founders usually hold ordinary shares. If one founder has put in cash and another has not, a loan from the first is often cleaner than a different class of shares, which investors will want to unwind later.

Vesting means each founder's shares are released over time. The usual pattern in the UK is four years with a one-year cliff: nothing vests in the first year, a quarter vests at the first anniversary, and the rest vests monthly after that. A founder who leaves after six months leaves with nothing; one who leaves after two years keeps half.

Founders often object that they already own the shares. They do, which is why the agreement works by giving the company (or the other founders) an option to buy back the unvested shares at nominal value if the founder leaves. Investors will insist on vesting in any case, so agreeing it now avoids a more painful version later. Add acceleration on a sale of the company, so a founder is not left half-vested on exit.

Vesting decides how many shares a departing founder keeps; the leaver provisions decide what happens to them. The conventional split: a good leaver (death, long-term ill health, redundancy, dismissal without cause) keeps vested shares, or sells them at fair value. A bad leaver (resigning in the early years, dismissal for gross misconduct, breach of restrictive covenants) sells vested shares at the lower of what was paid and fair value, and loses unvested shares entirely.

The point of contention is usually voluntary resignation. Treating every resignation as bad leaver is harsh and can be challenged; treating it as good leaver removes the incentive to stay. A middle route, bad leaver for resignation within the first two years and good leaver after that, is common.

Who is CEO, who holds the technical side, who signs what. Whether each founder is full time, and from when. What salary, if any, and when that changes. Then the decisions that need everyone's consent whatever the shareholding: issuing shares, taking debt above a threshold, selling the business, changing what the business does, hiring or firing a founder, spending above a set figure.

With two founders, add a deadlock clause. Without one, a 50:50 company that disagrees has no way out except the courts. Common answers: a nominated chair with a casting vote on operational matters, an escalation to mediation, and as a last resort a buy-sell mechanism where one founder names a price and the other chooses to buy or sell at it.

Everything a founder creates for the business must belong to the company. For work done after incorporation under an employment or service agreement, that is usually automatic for employees and must be written down for anyone else. For work done before the company existed, which is most of the early code, brand and content, it belongs to the person who made it until it is assigned.

The founders' agreement should contain an assignment, and for pre-incorporation work a separate founder IP assignment deed is cleaner, because investors will ask for it by name in due diligence. Pair it with confidentiality and a promise not to use the company's IP in a side project.

Restrictions on transferring shares (no sale to an outsider without offering them to the other founders first), drag-along so a majority can deliver the whole company to a buyer, tag-along so a minority can join a sale on the same terms, and non-compete and non-solicit covenants for a period after leaving, kept short enough to be enforceable.

Also decide what the agreement does when investors arrive. Most founders' agreements terminate and are replaced by an investor-round shareholders' agreement and new articles; the founders' vesting and leaver terms usually carry across into those documents.

Write it down while you still agree. A founders' agreement template for England and Wales covers all six, with a note beside each choice; it is £99, or £119 as the Founders pack with the IP deed, an adviser agreement, board minutes and an NDA. If the equity split is unusual or one founder is also the main investor, a fixed-fee review of the finished document is worth the £149.