TL;DR. The Founders’ Agreement is the pre-incorporation handshake turned into a writing. It fixes, on paper, the four things co-founders fight about most often: equity splits, roles, IP, and what happens if someone leaves. For most teams it’s a short-fuse interim document — the real provisions migrate into the Certificate, Bylaws, Restricted Stock Purchase Agreements, and PIIAs as soon as the company is actually formed.
This post is part of the Montague Entrepreneur Forms Library — a free, plain-English collection of the legal documents every startup needs between its first day and its Series A. Pillar: Founder Equity.
What this document actually does
A Founders’ Agreement is the contract the co-founders sign with each other before (or very shortly after) they form the company. Its job is to write down, while everyone is still friends and aligned, the specific answers to the questions that tear founder teams apart eighteen months later. Who owns what percentage of the company? Who gets to make which decisions? What happens to a founder’s equity if they quit — or if the other founders fire them for cause? Who owns the IP that one founder started building in their garage two months before the company existed? A good Founders’ Agreement names all of those answers and reduces them to a signed document.
This is different from — and should be replaced by — the proper corporate documents as soon as the company exists. Once you incorporate and issue restricted stock subject to vesting under a Restricted Stock Purchase Agreement, the Founders’ Agreement has served its purpose and should be superseded. The risk of keeping both around is that they say slightly different things about the same topic; the fix is to explicitly terminate the Founders’ Agreement on the day you execute the corporate documents.
When you’ll encounter it
Three situations. First: you and a co-founder are still working on an idea at nights and weekends and you want to lock in the equity split before one of you quits their day job. Second: you’ve decided to incorporate but you’re waiting two or three weeks for the Certificate to file and you want something in writing in the meantime. Third: you have three or more co-founders and you want to sort out the hard conversations (titles, vesting, cliffs, decision-making) before your lawyer starts billing by the hour to paper it. In all three cases, the Founders’ Agreement is the right tool. If you’re already incorporated, skip the Founders’ Agreement entirely and go straight to Restricted Stock Purchase Agreements for each founder.
The narrative — the four things founders fight about
Every founder dispute I have ever seen litigated or arbitrated traces back to one of four things: equity splits that weren’t clearly documented, vesting that wasn’t applied uniformly, IP that one founder brought in from a prior life and never formally assigned, or a departure where the remaining founders thought the leaving founder should forfeit unvested shares and the leaving founder thought they should keep everything. The Founders’ Agreement exists to answer all four questions in writing, in plain language, while the founders still trust each other enough to put the real answers on paper.
— Montague Law, Entrepreneur Forms Library
The four levers
Lever 1 — Equity splits
Equal splits are the easiest to document and the hardest to live with if the work turns out to be unequal. Unequal splits are harder to negotiate up front but map better to reality. A common compromise is an equal split with aggressive vesting and a clear mechanism for re-allocating unvested shares if a founder leaves. There is no universally correct answer — the wrong answer is leaving it undocumented.
Lever 2 — Vesting and the cliff
Four-year vesting with a one-year cliff is the market standard, and the Founders’ Agreement should adopt it even before incorporation. Founders who push back on vesting for themselves ("we built this together, why would I need to vest?") are the founders you most need vesting on — because vesting protects the other co-founders from the risk that you walk away in month four with half the company.
Lever 3 — IP contribution
Every founder has to assign their pre-existing IP to the company on day one. This includes code in a private GitHub repo, design files on a laptop, customer lists from a prior job (if legally transferable), and anything else that touches the company’s business. The Founders’ Agreement should contain a present-tense assignment and an obligation to execute further documents as needed. Without this, Stanford v. Roche problems wait in ambush at Series A diligence.
Lever 4 — Departure mechanics
What happens when a founder leaves — voluntarily, involuntarily, by death, or by disability? The Founders’ Agreement should specify the treatment of vested and unvested shares, whether there’s an acceleration, whether the remaining founders have a repurchase right, and how the departing founder’s continuing obligations (confidentiality, non-solicitation) survive. Getting this right in advance is cheap. Negotiating it after someone has already walked out is expensive and awful.
A clause worth reading twice
Each Founder hereby irrevocably assigns to the Company, effective upon the Company’s formation, all of such Founder’s right, title, and interest in and to any intellectual property conceived, developed, or reduced to practice by such Founder prior to the formation of the Company that relates to the business of the Company.
This is a present-tense assignment of pre-formation IP. Note the word "assigns" — not "agrees to assign." That distinction is the difference between a clean diligence report and a frantic 3am email chain during Series A closing. Use the present tense.
Traps for the unwary
- Equal splits with no vesting. This is the single most dangerous combination in startup law. Either split unequally, or impose vesting — ideally both.
- Forgetting to terminate the agreement at incorporation. When you file the Certificate and execute Restricted Stock Purchase Agreements, explicitly terminate the Founders’ Agreement in writing so there’s no overlap.
- Missing an 83(b) trigger. The Founders’ Agreement sometimes contemplates a deemed stock purchase that can start the 83(b) clock before incorporation. Don’t rely on this — wait for real stock, then file the real 83(b) within 30 days.
- Undocumented prior work. If one founder has been working on the idea alone for months, the others should know exactly what IP is being contributed and at what valuation.
- Role ambiguity. "We’ll figure out the CEO thing later" is how half of founder breakups start. Name the CEO in the agreement, even if it’s a placeholder.
How this fits into the founder journey
The Founders’ Agreement is a short-fuse document. It exists to bridge the gap between "we have an idea" and "we have a corporation with Bylaws, a board, and restricted stock issued to each founder." Once the real documents are in place, the Founders’ Agreement’s job is done. The important thing is that the real documents actually get executed — not two months later when someone has already quit.
Get this reviewed by Montague Law
Working on a deal? Montague Law drafts, reviews, and customizes startup legal documents on a flat fee designed for founders — not at the hourly rates of the big firms whose work product this library is designed to match. If you want this form tailored to your company, or a second set of eyes before you sign, email John.
This post is for general information only and is not legal advice. No attorney-client relationship is formed by reading it. If you’re about to sign something that matters, talk to a lawyer — preferably one who’s seen at least a hundred of these.
