Startups
Founders Agreement Checklist: 15 Terms Every Co-Founder Must Agree On
65% of startups fail because of co-founder conflicts. Not because of bad ideas or tough markets, because founders didn't agree on the basics before they started building. A founders agreement isn't optional. It's the single most important legal document for any startup with more than one founder.
What is a Founders Agreement?
A founders agreement is a legally binding contract between co-founders that defines the terms of their relationship, their contributions, equity ownership, roles, and what happens when things change. It's signed before or at the time of company incorporation.
The 15-Point Founders Agreement Checklist
1. 📊 Equity Split
How is equity divided? 50-50 is rarely the right answer. Consider: Who had the idea? Who's contributing capital? Who's working full-time vs part-time? Who has industry expertise? Use a framework like the Slicing Pie model for dynamic splits.
2. ⏳ Vesting Schedule
Standard: 4-year vesting with 1-year cliff. This means if a founder leaves in month 6, they get zero equity. After 1 year, 25% vests, then monthly/quarterly thereafter. Protects against co-founders quitting early with large equity.
3. 🎯 Roles & Responsibilities
Who is CEO, CTO, COO? Who handles what? Define clear swim lanes. Include decision-making authority for key areas: product, hiring, finance, fundraising, and partnerships.
4. 💰 Salary & Compensation
Will founders take salary? How much? When does salary start (often after fundraising)? What happens if one founder needs a higher salary? Define a founder salary framework that evolves with funding stages.
5. 💡 IP Assignment
All IP created by founders , code, designs, content, patents , must be assigned to the company, not individuals. This is non-negotiable for investors. Include prior IP that founders bring to the company and license terms for it.
6. 💰 Capital Contributions
How much is each founder investing? Is it equity or a loan? If a loan, what are the repayment terms? What happens if the company needs more capital, is it pro-rata or voluntary?
7. ⏰ Full-Time Commitment
Are all founders working full-time? If not, when do part-time founders go full-time? Can founders have side projects? Define "full-time" clearly (minimum hours, exclusivity).
8. 🚫 Non-Compete & Non-Solicitation
During tenure and for 1-2 years after exit. Note: Indian law (Section 27, Indian Contract Act) makes post-employment non-competes difficult to enforce. Focus on non-solicitation of employees and customers instead.
9. 🚪 Exit & Departure Terms
What happens when a founder leaves? Voluntary exit, termination for cause, death, or disability , each needs different treatment. Define good leaver (retains vested equity) vs bad leaver (forfeits all/partial equity).
10. 🔒 Confidentiality
Founders must keep company information confidential during and after involvement. Include trade secrets, customer data, financial information, and strategic plans. Survive termination indefinitely.
11. 🗳️ Decision-Making & Deadlocks
Day-to-day decisions vs major decisions. Define which decisions need unanimous consent (fundraising, pivoting, hiring C-level, selling the company). Include a deadlock mechanism for 50-50 disagreements.
12. 📈 Anti-Dilution Protection
What are founders' rights during future fundraising? Can founders participate in future rounds? Define pre-emptive rights and anti-dilution mechanisms.
13. 💸 Expense Policy
How are business expenses handled? Approval limits for individual founders. Reimbursement process. Prevents one founder from spending company money freely.
14. ⚖️ Dispute Resolution
Mediation first, then arbitration. Choose an arbitration seat (typically where the company is registered). Avoid litigation. It's slow and public.
15. 📜 Company Structure & Governance
Board composition, shareholder meetings, voting rights, reserved matters. Include how new directors are appointed and removed. Plan for ESOP pool (typically 10-15%).
When Should You Sign?
Before you write a single line of code. Ideally, before incorporation. At minimum, before any significant capital, effort, or IP is contributed by any founder. The conversation gets harder the longer you wait.
Common Mistakes
- ❌ Equal equity split without vesting: A founder can walk away with 50% after 3 months
- ❌ No IP assignment clause: A departing founder can claim ownership of the product code
- ❌ Verbal agreements: "We discussed it over coffee" won't hold in court
- ❌ No exit mechanism: Founders trapped in a company they want to leave
- ❌ Ignoring sweat equity valuation: The founder who codes for 6 months pre-revenue deserves recognition
Don't Sign Blindly.
Templates are just a start. Use AI to scan your specific contract for hidden risks and unfair clauses in 60 seconds.
Analyze Your Contract Free →Key Takeaways
- ✅ Sign a founders agreement before writing code or incorporating
- ✅ Never do a 50-50 split without vesting and a deadlock mechanism
- ✅ IP assignment to the company is non-negotiable
- ✅ Define good leaver vs bad leaver exit terms
- ✅ Include non-solicitation (more enforceable than non-compete in India)
Frequently Asked Questions
Is a founders agreement legally required in India?
No, it is not legally required. However, it is strongly recommended before incorporating a company. Without one, disputes over equity, roles, IP ownership, and exit terms become extremely difficult to resolve. Most investors and accelerators require a founders agreement before funding.
What is vesting in a founders agreement?
Vesting is a mechanism where founders earn their equity over time instead of receiving it all upfront. Standard vesting is 4 years with a 1-year cliff, meaning a founder gets 0% if they leave before year 1, 25% at year 1, and the rest monthly over the next 3 years. This protects the company if a co-founder leaves early.
How should co-founders split equity?
There is no fixed formula. Consider each founder's contribution: idea originator, technical expertise, business development, capital investment, and full-time vs part-time commitment. Equal splits (50-50) are common but can cause deadlocks. Whatever the split, use vesting to protect all parties.
What happens if a co-founder leaves without a founders agreement?
Without an agreement, the departing co-founder retains all their shares with no vesting clawback, may take IP they created, can compete directly with the startup, and disputes go to expensive litigation. This is why a founders agreement before incorporation is critical.
Related reads: Non-Compete Clause India · IP Assignment Agreement Guide · Joint Venture Agreement Guide