Introduction

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As startups scale, co-founders face a critical challenge: formalizing their relationship legally.
Forbes ranks failing to draft a founders’ agreement among the top 10 legal mistakes by startups, while Paul Graham, co-founder of Y-Combinator, notes that poorly structured agreements often cause fatal conflicts.

So, what terms should a U.S. founders’ agreement include? And where do most agreements go wrong?

This article outlines the key sections and best practices for drafting a founders’ agreement that protects your startup, your intellectual property, and your partnership.

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4 Core Areas to Address in a Founders’ Agreement

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1. Roles & Responsibilities – Define who does what, including titles and functional leads.

2. Rights & Rewards – Outline decision-making authority, equity, board positions, and compensation.

3. Commitments – Specify intellectual property, time, capital, networks, and confidentiality.

4. Contingencies – Include vesting, departure scenarios, buyback rights, and options for future equity.

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Roles & Responsibilities

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Even if co-founders have complementary skills, clearly defining roles and responsibilities is critical.

• Functional Alignment: Assign responsibilities based on expertise: operations, product, sales, or fundraising.

• Title Expectations: Agree on leadership roles (CEO, CTO, etc.) early, and plan to reevaluate every 6–12 monthsas the company scales.

• Flexibility: Structure roles to allow adaptation without restricting contributors.

 

Questions to Ask

• What are the formal titles of each founder?
• Are responsibilities clearly defined and limited?
• How will roles evolve over time?

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Rights & Rewards

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Founders’ rights evolve once investors join. Your agreement should clearly define:

• Decision Rights: Who makes strategic choices, hires, equity grants, or fundraising commitments? Include deadlock resolution mechanisms.

• Equity Allocation: Consider separating decision rights from equity ownership to prevent conflict.

• Board Representation & Observer Rights: Establish who sits on the board and how other founders participate.​

 

Questions to Ask

• Who decides what?
• What decisions require consensus vs. unilateral authority?
• How will equity and voting rights be allocated?

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Commitments

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Commitments outline time, IP, capital, and networks contributed by each founder.

• Time: Define full-time expectations and part-time allowances.

• Intellectual Property: All IP created for the startup should be assigned to the company to prevent disputes.

• Network Sharing: Clarify expectations for leveraging personal networks.

• Capital & Confidentiality: Record personal contributions and enforce confidentiality clauses.

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Questions to Ask

• How many hours constitute full-time for each founder?
• Are IP and capital contributions properly documented?
• Will founders share networks and connections?

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Contingencies

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Even with a solid agreement, unexpected issues arise. Include vesting schedules and exit provisions:

• Time-based Vesting: Typically quarterly over four years with a one-year cliff.

• Milestone-based Vesting: Align equity with tangible achievements.

• Departure Terms: Decide if unvested equity returns to the company or other founders.Option Pool Planning: Reserve equity for future hires or additional grants.

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Questions to Ask

• What happens if a founder leaves or is asked to leave?
• Will unvested shares return to the company?
• How will acquisitions or sales be handled?

 

Recap

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A founders’ agreement is not optional—it is a roadmap for navigating uncertainty, preventing conflicts, and fostering trust. It should:

• Clarify roles, responsibilities, and decision rights.

• Separate equity from authority.

• Secure IP and capital contributions.

• Include contingency plans for vesting, departure, and equity options.

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“Plan carefully, document everything, and revisit your agreement periodically. It’s the legal backbone of your startup’s success.”

Antonio Iorio​