"The founder's pact - the contract that turns founders into a team"

Transforming an idea into a company is exciting, but most founders make their first mistake right at the beginning by relying on informal handshake agreements with their partners.

These unwritten understandings often fail, especially when stakes increase and hard decisions must be made. Without clear agreements, small misunderstandings can escalate quickly, harming both the business and personal relationships.

This is why a founder’s pact is important: it gives your startup a legal and operational foundation, clarifies roles and ownership, protects its intellectual property rights, and demonstrates professionalism and preparedness to investors from day one.

The cost of flying blind

Many founders rely on personal trust or longstanding friendships as the foundation for their business relationship. This, as a principle, makes sense: we are starting a project with our friends, family, the people we trust.

But it is also risky both professionally and personally, as most high-potential startups fail due to founder conflict and misalignment.

In fact, without a clear written agreement between founders, disagreements become much harder to solve. Without a framework outlining authority and voting rights, equal equity splits can lead to standstills. Intellectual property rights are another minefield. If key IP contributions aren’t properly assigned, you can have costly ownership disputes arise that can drain your startup in legal fees.

Not only that, but when co-founders part ways without clear arrangements, departed founders often keep sizable equity they no longer earn, resulting in “dead equity”. This leaves remaining founders diluted and makes raising future funding more difficult, as potential investors will see a cap table full of inactive shareholders as a red flag. In fact, dead equity and unaligned ownership are among the top reasons investors walk away.

This is why investors often check whether these agreements exist during their due diligence process and their absence often shows weak governance, future trouble, deterring investment.

A founder’s pact helps avoid these issues by giving everyone clarity, protecting both relationships and the business from disaster. It focuses specifically on the dynamics and commitments between co-founders, covering topics like equity vesting and what happens if someone exits. By making assumptions explicit, the founder’s pact prevents small disagreements from becoming business-ending problems.

What your pact should address

Founder’s pacts should address eight areas to ensure the stability of the project and protect everyone involved. Discussing and defining these with your colleagues is and important step if you want to avoid future disputes and show investors your business is serious from day one.

1. Equity splits and vesting schedules

Clearly outline the percentage of ownership each founder receives.

You can go beyond just assigning shares, structuring them with a four-year vesting schedule and a one-year cliff, for example: no shares vest if a founder leaves within the first year, and vesting continues monthly after that.

This ensures only founders who remain committed earn equity, preventing situations where departed co-founders hold unearned shares.

2. Roles, responsibilities, and decision-making

Define who is in charge of what.

Clearly state each founder’s title, areas of responsibility, and the decisions that need unanimous consent versus those that only require a majority.

Put deadlock resolution mechanisms in place so stalemates don’t freeze your startup’s progress.

3. Intellectual property

Make sure the startup (not the individual founders) owns all IP developed for the business, including anything created before formal incorporation.

All founders must transfer their rights to the company and future agreements must cover ongoing developments to prevent disputes that could repel investors.

4. Capital contributions

Specify what each founder is putting in, whether cash, assets, or services.

Clarify if contributions are loans, equity, or gifts and agree on repayment or conversion terms if relevant, to avoid misunderstandings about financial obligations at the start or in the future.

5. Exit provisions and buyouts

Plan for founder exits with clear rules about valuations, payment structures, and departures.

Set out rights for remaining founders to buy back equity, and consider including drag-along/tag-along clauses for future acquisitions.

6. Confidentiality and non-compete

Include confidentiality clauses that outlast the agreement for at least twelve months. Address non-competes even after the founders leaves the startup, keeping in mind local enforceability.

7. Dispute resolution

Outline a staged conflict resolution process to resolve issues quickly and keep relationships intact. For example, negotiation, then mediation, then binding outcomes like arbitration.

8. Timing and implementation

Draft your founder's agreement before incorporating your company. This approach protects each founder’s interests from the outset and gives your team a clear framework before any legal entity is formed.

It is important to use these conversations with your colleagues to align on expectations, anticipate future scenarios, and identify potential friction points. Think of this as an early test of team compatibility: if you cannot resolve disagreements now, you may struggle even more under pressure later on.

If you’re operating on a limited budget, start with a simple customizable template from a reputable source that covers essentials like equity split, vesting, and IP. This minimum viable agreement, that can be tweaked to your particular case, lets you move forward while planning for a comprehensive upgrade later on drafted by a lawyer when funds become available.

And make your pact a living document. Schedule reviews annually or after major milestones such as fundraising rounds. This keeps your agreement in step with the company’s growth and everyone involved on the same page.