Two friends. A great idea. A startup full of enthusiasm. And no founders' agreement. "We're friends — we'll always work it out." We hear this all the time. And we regularly see how it ends.
What is a founders' agreement?
A founders' agreement (also called a shareholders' agreement) governs the rules of co-existence between shareholders in the company. It isn't legally required, but it's one of the most important documents a startup can have. While the memorandum of association is a public document with content prescribed by law, the founders' agreement is a private arrangement capturing what doesn't belong in the Commercial Register.
Why isn't the memorandum of association enough?
The memorandum covers the formal mechanics of the company — who is the director, how voting works, what the share capital is. But it doesn't address:
- What happens if one of the founders leaves after six months
- Whether a departing founder can go work for a competitor
- How proceeds are split in the event of a sale
- Who has veto rights over key decisions
What should a founders' agreement contain?
Vesting
Shares "unlock" gradually over time. If a co-founder leaves after 6 months, they don't take their full stake. Standard vesting: 4 years with a 1-year cliff — after one year you receive 25% of your interest, then 1/48 per month thereafter.
Cliff
The minimum period before vesting begins — typically 1 year. If you leave before the cliff, you get nothing. Harsh? Maybe. But it saves companies.
Drag-along
If majority shareholders want to sell the company, they can "drag" minority shareholders along. Without drag-along, a minority shareholder can block the entire exit. Investors always require this.
Tag-along
A minority shareholder has the right to sell their stake on the same terms as the majority. This protects minorities — the majority can't sell to a strategic buyer without giving the minority the same opportunity.
Non-compete and non-solicitation
What happens if a founder leaves and starts a competing business? Or poaches your employees? Without clear clauses, you're left fighting it in court — which is slow and expensive.
Deadlock mechanism
How do you resolve a situation where two 50% shareholders disagree on a key decision? Without a clear mechanism the company can end up paralysed. Solutions: mediation, a "shotgun" clause, or the right to buy out the other party at a pre-agreed price.
A real-world story
Jan and Pavel built an e-commerce startup together. Jan led tech, Pavel ran sales. Things were going well — until Pavel decided to leave. Because they had no founders' agreement, Pavel walked away with a 50% stake and no obligation not to compete. He started a similar business, poached two key employees, and Jan eventually had to sell the company for a fraction of its value.
A founders' agreement would have solved all of this upfront — at a fraction of what Jan ultimately paid.
When should you sign it?
Ideally right at the start — before you invest the first money or approach the first customers. The longer you wait, the harder it is to agree on terms (everyone's expectations solidify over time).
Want a founders' agreement that genuinely protects you? We draft them regularly — and we know exactly what not to miss.