If you're launching a business with co-founders, getting your legal foundations right from day one is essential. A well-drafted founders’ agreement helps protect your business, clarify responsibilities and reduce the risk of disputes that could derail growth or future funding.
In this guide, we explain why early-stage founders should put a bespoke agreement in place before raising investment, hiring a team or preparing for an eventual exit. From equity splits and IP ownership to decision-making and founder departures, we cover what to include and why it matters.
Want expert help drafting a founders’ agreement that supports your growth? Our corporate lawyers work with founders at every stage to build strong legal foundations that attract investors and protect what you’ve built.
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What is a founders’ agreement?
A founders’ agreement is a contract between the original co-founders of a business. A founders’ agreement sets out who owns what, who’s responsible for which parts of the business, how decisions will be made, and what happens if someone wants to leave or isn’t pulling their weight. Explore what to include in a founders’ agreement to set clear expectations from the outset, covering roles, equity, decision-making and what happens if someone exits in out article.
In the rush to get a product to market or secure early funding, it’s easy to skip this step. But without a clear agreement in place, even the strongest founding teams can run into trouble down the line.
Founders’ agreements are different from the shareholders’ agreements that you may encountered. They are closely related but different documents:
- A founders’ agreement is designed for the earliest stage of a business, typically before external investors come in. It focuses on the founding team’s roles, responsibilities, and commitments
- A shareholders’ agreement is broader. It governs relationships between all shareholders (including investors) and usually comes into play as the business grows
You’ll likely need both as your business develops, but the founders’ agreement is your starting point. It puts the right structure in place from the beginning and can help shape the shareholders’ agreement later.
Find out what a shareholders’ agreement should contain, including rights, obligations, dispute resolution and how to protect minority shareholders in this guide.
Why do start-ups need a founders’ agreement from day one?
In the context of a funding round
- Investors expect to see it. If you’re preparing for a funding round, don’t be surprised when investors ask for your founders’ agreement. It’s a basic due diligence item, and a missing one can raise red flags
- It protects investor interests. No one wants to invest in a business where the founders fall out and there’s no clear plan for what happens next. A well-drafted agreement helps prevent messy disputes that can damage the business (and their investment).
- It clarifies equity, vesting and dilution. Equity splits can cause serious friction, especially if a founder leaves early but keeps their full share. A solid agreement should include vesting provisions that make equity conditional on continued involvement and set out how dilution will be handled.
- It shows maturity and planning. Having a tailored agreement in place shows that your team is thinking ahead, has a governance structure, and is building on solid ground. That builds trust, and that’s something every investor values.
In short, if you’re aiming for external funding, a founders’ agreement isn’t just helpful, it’s a must.
Find out how to get your business investment-ready with this guide to preparing for your first funding round, covering legal documents, due diligence and investor expectations.
In the context of an M&A
A founders’ agreement isn’t just useful in the early stages, it can also be a deal-saver later on if you're planning to sell, merge, or bring in strategic partners.
Here’s how it supports you during an M&A process:
- Reduces the risk of disputes derailing a deal. Buyers don’t like surprises. If a transaction is at risk because co-founders disagree over who owns what or who gets what on exit, it can alarm potential acquirers or kill the deal entirely
- Clarifies IP and ownership. Founders often create valuable intellectual property such as code, designs, branding, or customer data. A good agreement ensures those assets are clearly assigned to the company, not the person who created them
- Makes due diligence smoother. During M&A, buyers will comb through your legal documents. A proper founders’ agreement speeds up the process and reduces back-and-forth, saving time and professional fees
- Gives buyers confidence in your governance. Well-run businesses tend to have clear internal agreements in place. It shows professionalism, forethought, and reduces the risk of post-deal headaches
- Can include exit clauses and responsibilities. You can use a founders’ agreement to agree in advance what happens when someone leaves or when the company is sold, including handover responsibilities, post-sale commitments, or share transfer terms
In short, if exit is part of your long-term plan (and for many founders, it is), this document helps keep the path clear.
Having a solid legal foundation from the start
Start-ups often move fast, but when it comes to your legal foundations, cutting corners now can create real problems later. A well-drafted founders’ agreement is a big part of this, but it should sit alongside other key documents like your shareholders’ agreement, employment contracts, and IP assignments.
Getting the legal basics right from the start helps you:
- Establish clear ownership. Make sure everyone knows who owns what, and under what conditions. That includes equity splits, vesting schedules, and how shares can be transferred or sold
- Protect your IP. Your product, brand, and tech are likely your most valuable assets. A solid legal setup ensures these are owned by the company, not left with individual founders or contractors
- Avoid future disputes. Clear agreements help resolve issues before they escalate. They also reduce the risk of costly legal battles down the line, whether between founders, early employees, or investors
- Attract investors and partners. Sophisticated investors will expect strong legal governance. If your documents are in order, it’s easier to raise capital, negotiate deals, and bring in strategic partners
- Clarify founder roles and responsibilities. Early-stage businesses often operate informally, but lack of clarity about who’s doing what can lead to friction. A founders’ agreement helps set expectations around leadership, decision-making, and time commitments
- Support hiring and incentivising early team members. If you’re planning to offer equity to employees or advisors (e.g. via share options), your legal structure needs to support that from the outset, ideally with advice on how best to do it tax-efficiently
- Enable smoother contract negotiation. A business with its legal paperwork inplace is more credible when negotiating with suppliers, customers, or partners. It reduces delays and helps close deals faster
- Avoid problems with Companies House compliance. Seemingly small administrative oversights, like misfiled share issuances, can cause bigger problems later during funding or sale. Getting professional support early helps you stay compliant
- Give you peace of mind. Knowing your business is built on solid ground lets you focus on growth, product, and customers, without worrying that a paperwork issue could unravel your progress later
- Lay the groundwork for long-term success. Building a business is tough enough, so don’t let shaky legal documents trip you up just when things are taking off
Strong legal foundations won’t guarantee success, but they’ll help you avoid preventable failure. And in the long run, they’ll support your growth rather than hold you back.
In this article, read about the essential legal documents every start-up needs, from incorporation and IP protection to contracts and investment paperwork.
The risks of not having a founders’ agreement in place
Skipping a founders’ agreement might save time in the short term, but it can create major problems later, especially when things don’t go to plan.
Many start-ups stumble not because of product or market issues, but because of internal fallouts. Without a written agreement, even minor disagreements can escalate. You may feel that you trust your co-founders, but verbal agreements often don’t hold up when it matters. Who owns what? Who’s in charge of what? If these aren’t written down, it’s easy for misunderstandings or legal disputes to arise. Understand the key factors that shape strong co-founder relationships, including legal protections, communication strategies and planning for potential disagreements in this article.
In terms of intellectual property, if it’s not clear that the company owns the IP, it can become a sticking point during investment or sale. In some cases, it may even prevent you from using your own product or brand freely.
Investors and buyers will want to see that everything is in order. Missing or unclear documentation can delay a deal, increase costs, or even cause it to fall through entirely.
In short, not having a founders’ agreement in place leaves your business exposed, often at the worst possible time.
What kinds of provisions are usually included?
Every business is different, but a good founders’ agreement will typically cover the following:
- Time and commitment expectations. How much time is each founder expected to dedicate to the business, and whether this is on a full-time, part-time, or advisory basis? What happens if someone becomes less involved? Setting this out early helps avoid resentment later
- Decision-making processes. Who has the final say on major business decisions? Can one founder act alone? A clear process for board-level and day-to-day decisions helps avoid gridlock and confusion
- Founders’ restrictions (non-compete/non-solicit). To protect the business, founders may agree not to set up competing companies or poach staff or clients if they leave. These clauses should be carefully tailored to be enforceable and fair
- Dispute resolution mechanisms. If there’s a serious disagreement, how will it be resolved, by mediation, arbitration, or majority vote? Having a process in place can prevent a standoff from turning into a legal battle
- Founder departure and ‘bad leaver’ provisions. What happens if a founder leaves voluntarily? What if they’re removed for misconduct? These provisions help define what happens to their shares and responsibilities
- Drag-along and tag-along rights. These provisions can ensure that founders (and future investors) are aligned when a sale happens. This allows majority shareholders to sell the company and minority shareholders during an exit
- Deadlock scenarios. If two co-founders can’t agree, what’s the tie breaker? A deadlock clause can include buy-sell mechanisms or third-party mediation to prevent paralysis.
- Founders' duties and ethical standards. Some agreements include a values statement or code of conduct, to keep founders aligned on culture as well as strategy
These provisions aren’t just legal formalities, they’re tools to build trust, reduce risk, and support your business as it grows.
How to draft a founders’ agreement and get the right advice
It can be tempting to download a free template or use an online tool to save time and money, but a one-size-fits-all approach rarely works when it comes to your founding team.
The fact is that off-the-shelf agreements don’t know your business, your growth plans, or your investor roadmap. They might miss key clauses, or worse, include ones that create risk down the line.
Working with a lawyer means the agreement is written around your individual business: who you are, what you’re building, and where you’re going. They can flag potential pitfalls, make sure your IP is properly protected, and ensure the agreement works alongside your company’s other legal documents. Fixing legal problems later is always more expensive than getting it right from the start. A bespoke agreement reduces the risk of founder disputes, protects you during funding rounds, and gives investors more confidence in your structure.
Getting legal advice early isn’t just about the documents, it shows you take your responsibilities seriously. It’s the kind of maturity that reassures investors, employees, and partners alike.
If you're serious about growth, don’t treat your legal foundations as an afterthought. Getting expert help now can save you a lot of stress and set you up for long-term success.
We work with founder-led businesses at every stage of growth. Get in touch to speak to a solicitor who understands the challenges and opportunities of building from the ground up.
At Harper James, we specialise in startup funding. We’ve supported hundreds of founders across funding rounds, helping them draft, negotiate, and close deals with confidence
