Most founder disputes I see would have been prevented by a two-page document signed in month one. The problem is that nobody wants to discuss failure while everyone is excited.
The clauses that matter most
- Equity split, and whether it is fixed or adjusts on milestones.
- Vesting with a cliff. The single most important clause. Typically four year vesting with a one year cliff, so a founder who leaves in month eight takes nothing and a founder who leaves in year two takes half. Without it, a co-founder can walk away in month three holding 50 percent of a company they no longer contribute to, and there is nothing you can do.
- IP assignment. Everything created by a founder for the business is assigned to the company. Under the Copyright Act the author owns the work unless there is an assignment or a contract of employment, so code, designs, content and brand assets created by a founder before incorporation belong to that founder personally until assigned in writing.
- Roles, responsibilities and time commitment, including whether a founder may hold another job.
- Decision-making: what needs unanimity, what does not, and how deadlock is broken in a two-founder company.
- Leaver provisions: good leaver and bad leaver, what happens to vested and unvested shares, and at what price.
- Confidentiality and non-solicitation, which are enforceable, unlike broad post-exit non-competes.
Do it before you raise, not because you are raising
Every investor will require vesting and IP assignment at the term sheet stage. Doing it then means renegotiating equity with a co-founder while a funding round is on the table, which is the worst possible moment. Doing it at the start costs nothing because nobody has anything yet.
Every investor will require vesting and IP assignment at the term sheet stage. Doing it then means renegotiating equity with a co-founder while a funding round is on the table, which is the worst possible moment. Doing it at the start costs nothing because nobody has anything yet.
Getting it into the company
Once the company is incorporated, the founders agreement should be reflected in the articles of association and, where investors come in, folded into the shareholders agreement. An agreement that sits in a drawer and contradicts the articles will not do the job.