What is a Founders’ Agreement, and Do You Need One?

Written by Amreet Toor
JD Candidate 2025 | UCalgary Law

In the excitement of creating a start-up business, it is easy to overlook important steps such as creating a founders’ agreement.  While an agreement may not be necessary for all businesses, there are potential scenarios where it may be very detrimental to the long-term success of a business if a proper agreement is not created from the outset. 
 
A founders’ agreement, also known as a co-founder agreement, establishes the framework for the relationship between the founders and addresses various aspects of the business, providing clarity, protection, and a shared understanding. This may not seem very important in the beginning when the founders involved have a clear picture of their roles and responsibilities. Still, as the business grows and evolves, expectations and responsibilities may begin to change from what was originally discussed. To address and prevent these potential issues, most founders’ agreements will contain provisions regarding equity distribution, vesting terms and schedules, roles and responsibilities, decision-making procedures, compensation, intellectual property rights, non-competition and non-solicitation, confidentiality, exit strategies, and dispute resolution[1]. 
 
Equity distribution provisions clarify the allocations of equity or shares in the company that the founders will be entitled to based on their contributions to the new business. These contributions can be financial, time or in kind. Vesting terms and schedules outline the conditions under which founders become entitled to their allocated equity. This prevents founders from leaving the business with a significant ownership stake earlier than planned or failing to uphold their commitments to the business. A well-planned vesting schedule protects the other founders while encouraging long-term commitment to the business. Zipcar[2] is an excellent example of a company that would have greatly benefitted from a well-planned vesting schedule.
 
 Provisions that outline founders’ roles prevent future misunderstandings and conflicts. These provisions are not guaranteed to cover all possibilities and may need to be amended over time as the business grows.  Compensation may be tied to these roles and may also need to be adjusted as the business grows, but creating these provisions ahead of time prevents litigation that could arise based solely on verbal agreements. 
 
Decision-making provisions outline the decision-making process and specify how major decisions will be made, including what constitutes a quorum to pass decisions.  In conjunction with this provision is the dispute resolution process, which works to smoothly handle any disputes that arise and can help to avoid lengthy and costly litigation between founders and the corporation.
 
Intellectual property is one of the most important provisions in a founders’ agreement. It is crucial to designate whether intellectual property is the property of a founder or the corporation. If the intellectual property does not rest with the corporation, a founder may exit the business and effectively shut it down by taking the intellectual property rights with them. They may also choose to hold the business hostage by controlling the intellectual property[3].  Intellectual property is not limited to copyright or patents but can also include trade secrets. Waiting to create a contract that outlines intellectual property rights can result in serious harm, such as a founder stealing the idea and creating a competing venture, as alleged by the Winklevoss twins.[4] This is why confidentiality agreements are also crucial to the long-term success of a business. Confidentiality agreements prevent founders from sharing crucial information about the business outside of a select group of people. In combination with non-compete and non-solicitation provisions, confidentiality agreements protect the corporation’s interests from founders who choose to exit the business.
 
Finally, there is the exit strategy provision. It is an eventuality that founders will need to exit the business to be able to sell the equity they have been allocated, and to reap the rewards of their hard work. A properly planned exit strategy will consider procedures for selling the business, transferring ownership, or handling other exit scenarios. It will vary greatly depending on the organization, but it is important to set out early to avoid conflict and possible litigation.
 
Considering this information, a founders’ agreement can be a powerful tool to protect the interests of both the founders and the corporation. It allows for easier conflict resolution, aligns the interests of all founders, and provides clarity.
 


[1] Raz. “The Importance of Founder Agreements: Key Considerations for Startup Founders.” Falcon Law PC, 4 May 2023, falconlawyers.ca/the-importance-of-founder-agreements-key-considerations-for-startup-founders/. Accessed 29 Oct. 2023.

[2] Hellmann, Thomas, and Veikko Thiele. “Contracting among Founders.” Journal of Law, Economics, & Organization, vol. 31, no. 3, 2015, pp. 630. JSTOR, http://www.jstor.org/stable/43774415. Accessed 29 Oct. 2023.
 

[3] Fauri, Khaled El. “What Should a Founders Agreement Include and Why Do You Need One?” Fauri Law, 10 Oct. 2022, www.faurilaw.ca/blog/what-should-a-founders-agreement-include-and-why-do-you-need-one/. Accessed 29 Oct. 2023.

[4] Hellmann, Thomas, and Veikko Thiele. “Contracting among Founders.” Journal of Law, Economics, & Organization, vol. 31, no. 3, 2015, pp. 630. JSTOR, http://www.jstor.org/stable/43774415. Accessed 29 Oct. 2023.