Founders Agreements: Why You Need One Before Raising Money

Let’s be honest, launching a startup with your mates might sound like the beginning of a sitcom. But without a founders agreement? It could end like a courtroom drama.

Welcome to the chaotic and occasionally catastrophic world of startups. One minute you’re building an MVP in a basement fuelled by pizza and dreams. The next, you’re sitting across from a VC who wants to know how your equity is structured and you’re staring blankly at your co-founder.

Let’s fix that, shall we?

What Exactly is a Founders Agreement?

Imagine a prenuptial agreement for co-founders, minus the awkward family dinners. A founders agreement is a legal document that outlines the roles, responsibilities, ownership and expectations of each founder in a startup.

It’s your co-founder prenup, a peace treaty, your startup’s Day One constitution and yes, it’s that important.

This document can include everything from how equity is split to who gets to call themselves 'Chief Ping Pong Officer' (though we advise keeping titles professional for due diligence purposes).

Why Should You Care?

Because if you don’t, your startup might end up in flames before it gets funding. Harsh, but true.

Here's the brutal reality: investor interest dies quicker than a cheap domain name if your founding team looks messy.

The three top reasons why a founders agreement is essential before raising money:

1. Clarity: Everyone knows what they’re signing up for.

2. Protection: Prevents disputes before they turn into lawsuits.

3. Investor confidence: Shows you’ve thought beyond launch day.

If your founding team hasn’t formalised who owns what and what happens if someone exits early, investors may well assume you’re building a house on quicksand.

Key Clauses That Matter

Now that we’ve got your attention, let’s dive into the meat of a solid founders agreement. These aren’t just boring legal boxes to tick – they’re the framework for your startup’s success.

1. Equity Split

This one’s the biggie. How do you divide ownership?

• Equal? Not always fair.

• Based on contribution? Better.

• Vesting schedules? Absolutely.

Pro tip: use a 4-year vesting schedule with a 1-year cliff. If a founder walks away after six months, they shouldn’t walk away with 25% of your company.

2. Roles and Responsibilities

Avoid the 'I thought you were doing that' conversations and define who does what from the start. The CTO builds tech, the CEO pitches and the COO makes sure there’s coffee. Well, kind of.

3. Decision-Making Process

Deadlocks kill startups. Decide how decisions will be made through majority vote, CEO’s call, or tie-breakers? Don't leave it to chance (or a coin flip).

4. Founder Departure

What happens if someone leaves voluntarily or gets booted out? Do they keep their shares? Are they bought out? And how will this affect the morale of the remaining founders?

5. IP Assignment

Make sure all intellectual property belongs to the company and not to the founder who wrote the code on their laptop. That includes software, designs, branding and even the company name.

6. Conflict Resolution

Disagreements are inevitable so plan how you’ll resolve them e.g. mediation, arbitration or nerf war (again, probably not wise). Legal frameworks are better than playground brawls.

7. Confidentiality and Non-Compete

Founders often have access to trade secrets, make sure everyone agrees not to run off and start a suspiciously similar company two months later.

8. Dilution and Future Fundraising

Cover what happens when new shares are issued. You should agree on dilution terms to avoid ugly surprises at Series A.

What You Should Do Next

So, what now? If you’ve made it this far, you’re clearly someone who doesn’t want their startup journey to resemble a Netflix drama. Good call.

Step 1: Have “The Talk”

Sit down with your co-founders and discuss expectations, equity, roles and exit plans. Be honest. Be awkward. It’s worth it. Put everything on the table including the uncomfortable stuff.

Step 2: Get Legal Help

Unless you moonlight as a startup lawyer, hire a professional. Preferably one who knows their way around UK startup law and understands the nuances of founder dynamics.

Step 3: Document Everything

Verbal agreements don’t hold up in court so get your founders agreement in writing, signed and filed. Use digital signing platforms to keep things quick and organised.

Step 4: Revisit and Revise

Startups evolve and so should your agreement. Make sure you revisit it during major milestones like new funding, new team members or pivots. Don't wait until there's tension to dust off the document.

Step 5: Communicate Regularly

A good founders agreement won’t matter if co-founders stop talking. Be sure to set monthly check-ins. Treat each other with respect as your cap table and company culture depend on it.

Startup Founder FAQs (aka “Stuff You’re Too Embarrassed to Ask Aloud”)

Q: We’re best friends. Do we still need a founders agreement?
A: Especially because you’re best friends. Emotions and business don’t always mix well so get it in writing.

Q: Can we write one ourselves using a template?
A: You can. But should you? Probably not. Templates are a good starting point but professional legal input is worth its weight in equity.

Q: Should advisors or early employees be included in the agreement?
A: No. Founders agreements are just for founders. Use employment contracts and advisor agreements for everyone else.

Q: Is equity set in stone once it’s in the agreement?
A: Nope. You can (and often should) amend equity terms based on future funding, performance, and role evolution.

Q: What if one founder wants out after funding is raised?
A: Hopefully, your agreement outlines what happens. Typically, vesting protects the company from losing too much equity.

Q: What if someone isn’t pulling their weight?
A: That’s why roles, KPIs and review clauses exist. You can build in ‘cause-based termination’ clauses with equity forfeiture if needed.

Q: How long does it take to draft one?
A: With the right help it can be done in a few days. Don’t wait until you need one, do it now while things are good.

Skip the Drama, Sign the Agreement

Startups are hard enough without fallouts, feuds or fiery exits. A founders agreement won’t eliminate conflict, but it will certainly give you a blueprint for handling it like grownups.

It shows investors you’re serious, it builds trust and, perhaps most importantly, it lets you focus on building your product, not fighting your partners.

So before you pitch to investors, sort out your equity split, clarify roles and lock it down in a founders agreement. Your future self (and your cap table) will thank you.

Have you already created a founders agreement? Or are you just starting the conversation? Drop a comment below and share your experience, let’s help each other build better startups.