A Founders' Agreement is the document that sets clear rules for co-founders: who exits, on what terms and at what price. Below are five essential clauses, without which splitting a business will turn into courtroom chaos.
The key risk. A company's articles of association govern how the company is managed, but they do not describe vesting, a partner's exit, the non-compete or the forced buyout mechanism. All of this lives only in a separate founders' agreement.
1. Vesting Schedule
"My partner and I work 50/50" is a suicidal arrangement. If one of the founders leaves after three months, they still claim half the company. The solution is vesting: shares are "earned" gradually, usually over 3-4 years with a cliff (a minimum period after which shares begin to vest).
What to spell out. The cliff period (for example, 1 year), after which 25% of the shares vest, with the rest vesting monthly on a straight-line basis. On an early departure, unvested shares are returned to the company without compensation.
2. Right of First Refusal and Transfer Restrictions
A partner should not be able to sell their stake to an outside investor or a competitor without your knowledge. A right of first refusal (pre-emptive right) clause obliges them to offer the stake to you first at the same price.
3. The "Russian Roulette" Exit Mechanism (Shotgun Clause)
A classic method of forced separation when partners cannot agree on a price. One partner sets a value for the other's entire stake and gives them a choice: either buy out the offering partner's stake at that price, or sell their own stake at the same price.
4. How the Business Is Valued on Exit
The most common dispute is how much a stake is worth. Without a pre-agreed formula or appraiser, you will spend six months on expert valuations. Spell out one of the following options:
For example, "3 x annual net profit".
A roster of accredited valuation firms whose opinion both parties accept.
Valuation based on the latest investment round.
Also define what happens with debts, receivables and intangible assets - otherwise the pricing formula will leave gaps for disputes.
5. Non-Compete and Confidentiality After Exit
A departing partner should not be able to open the same kind of business next door and poach your clients. Spell out:
- The restriction period (usually 2-3 years).
- The geography (for example, "within 50 km of the company's office").
- Compensation for honoring the non-compete (optional but advisable).
- The obligation to keep trade secrets and not use the client database.
Articles of Association vs. Founders' Agreement: the Difference
| Issue | Articles of association | Founders' agreement |
|---|---|---|
| Vesting and cliff | No | Yes |
| Right of first refusal | Partially | Yes, in detail |
| Shotgun clause | No | Yes |
| Share valuation formula | No | Yes |
| Non-compete and confidentiality | No | Yes |
A founders' agreement is signed while the partners are still friends. Once conflict begins, agreeing on fair rules becomes almost impossible.
Frequently Asked Questions
What is a founders' agreement and why do I need it if I already have articles of association?
The articles of association govern general matters of company management, but they do not describe the procedure for a partner's exit, vesting, the non-compete or the shotgun clause. A Founders' Agreement is an internal agreement that protects you from conflict when splitting the business. Without it, any partner can sell their stake to anyone or demand half the company after working for just a month.
Can a founders' agreement be signed after the company is incorporated?
Yes, at any time. But the earlier, the better. If a partner has already announced their exit or a conflict has begun, they are unlikely to sign terms that worsen their position (for example, vesting with a cliff). It is recommended to sign the agreement within the first 1-2 months of the company's operation.
What should I do if a partner refuses to sign the founders' agreement?
This is a red flag. Without an agreement, you are taking a serious risk. Your options:
- offer to sign a softer version (for example, without penalties but with a right of first refusal);
- bring in a mediator;
- if the business is still only being planned - consider whether you should start it with such a partner at all.
A consultation with a G-Invest lawyer will help you assess the risks and prepare a painless version.
Does a founders' agreement affect raising investment?
Yes, positively. Investors want to see clear exit rules and vesting. If you do not have a Founders' Agreement, a venture fund may decline or require you to sign one on an urgent basis.
We will prepare a founders' agreement tailored to your business
The lawyers at G-Invest Consulting will spell out vesting, the right of first refusal, the shotgun clause, the share valuation formula and the non-compete so that splitting the business does not end up in court. We will also help you assess the risks of an existing agreement.