What to Include in a Founders Agreement — But You Probably Aren’t
All the non-legal provisions you should put in your agreement to keep your startup team high-performing.
Starting a business is exciting.
Especially so if you’re teaming up with people you’re excited to work with.
After you and your co-founders have decided on titles, duties, and responsibilities, don’t forget the key legal document that’ll formally outline your relationship: a founder’s agreement.
Why should you create one?
When the initial optimism and high from starting a business wears off, your founder’s agreement can provide clarity to a number of problems that I see as a mediator and executive coach working with seed-funded to Series B startup teams.
💡 Harvard Business School Professor Noam Wasserman found that 65% of high-potential startups fail because of conflict among co-founders.
When disagreements between co-founders occur, usually it’s around decision-making, who does what and when, differences in working styles, and interpersonal or personality clashes.
A lawyer, when creating your founder agreement, should, at a minimum, include:
• Each founder’s roles and responsibilities
• The amount of equity each person gets
• The cap table & vesting schedule
• What happens if someone is fired, dies, or wants to leave (exit clauses)
• Salaries (if applicable)
• Intellectual Property
These sections, however, do little to address and manage the people aspect of working together.
This article will walk you through the various non-legal components that you should also consider when writing up your founder agreement, optimizing collaboration between you and your co-founders so the team stays high-performing for the long run.
Key Takeaways
- Getting clear on the non-legal provisions that keep founder teams high-performing
- Why writing down the reason why the founders got into business together can help you later on as a team
- Creating a decision-making process that works for you and your team
- How to address change and disagreement through a realignment process and formal conflict resolution process
Why Did You Get Into Business Together?
There’s no shortage of startup stories where things got really bad between its founders.
Snapchat settled out of court with its third, less-known co-founder, Reggie Brown, to the tune of $157.5 million dollars.
Another startup, Cruise, worked out a deal with another co-founder who claimed he was being cheated out of 50% ownership.
Community, a startup that connects celebrities with fans through text messages, had two of its founders sue another founder after alleging fraud back in 2020.
When a business starts growing and showing signs of success, greed and ego can destroy the best of founder teams.
When I first start working with teams, I always ask them, “Why did you get into business together?”
Because whether they wanted to change the world with their idea, create the next big thing, or merely wanted to team up to do something together, they forgot the original vision that brought them together.
When major conflict strikes, this social history can be the difference between remembering the goodness of your past versus fighting it out and destroying the relationship in the process.
💡 Sample Language to Include this Within Your Founder Agreement: “We, as a Founding Team, have decided to get into business together for the following reasons: [Insert Reasons]
The initial social capital that brought you all together is something you can bank on when trying to recreate the positive in the midst of the negative — and for most teams, this spark can lead to much better results when negotiating solutions to problems.
The Values Underlying Your Business Relationship
Values are the underlying beliefs, attitudes, and preferences that influence why you do what you do — and are reflected in how the founders should speak, act, and collaborate with each other.
Values help guide actions, behaviors, and create team norms. They can act as a north star and help your team move in the same direction.
When a founder team has strong core values, they create a shared understanding of what is expected of each other.
Values also function as your team’s north star, which should help you all navigate decisions, communication, and can even help resolve potential disagreements.
Research likewise shows when teams live their values, team members feel more supported, motivated, and able to take risks and learn from their mistakes via improved psychological safety.
That’s why I encourage every founder team to brainstorm their values early on and to write them down in their founder agreement so everyone is clear on expectations and team norms.
A Process for Finding Your Team Values
This is the process I walk clients through so they can decide on their group values.
Step 1: Use My List of Values
I use the list below with clients, which you can also download or save to your google drive.
The list is not all-encompassing. You can google other lists if you feel this one is incomplete or want to use another list for whatever reason.
Step 2: Take 10 Minutes to Agree on Twenty Values Individually
Everyone takes ten minutes to individually develop their list of twenty values they would like to see the team uphold. To prime your mind for this part of the activity, everyone should ask themselves, “How can we act as our best selves while positively driving company and team performance?” By answering this question, you frame expectations while ensuring the values are about both individual and team performance.
Step 3: Take 20-30 minutes to Agree on Ten Values as a Team
Here, everyone individually discusses their values. Open up a Google doc if done virtually, or write out everyone’s response on a whiteboard. Openly discuss areas of alignment and where you disagree. Get the list down to ten as a group.
💡 Pro Tip: If you have problems as a team getting the list down to ten, you may want to ask why and start there. Why aren’t you able to agree? What is preventing you all to come to a collaborative outcome? Use these questions to uncover some of those aspects and you can move forward productively.
Step 4: Take 20 minutes to Agree on Five Values as a Team
Once you’ve established a list of ten values, take twenty minutes to narrow the list down to five. This may be challenging. But how you have the conversation will very much depend on everyone’s ability to collaborate and create a shared vision, which should be the focus of this exercise.
Step 5: List the Five Values in Order of Importance with a Small Explanation
Create value statements that explain the five values you have chosen as a group. Make them action-oriented. These two lists below show how some startups and more established companies wrote out their statements and the values associated with each.
Early-stage teams should also use their values to create the company values that they’ll use to scale their culture after hiring their first employees.
Ultimately, the values you decide on will drive your team’s performance — and from what I have seen, make difficult decisions and conversations easier for everyone involved when everyone recognizes what is expected of them and how they should act.
A Decision-Making Process between the Founders
The Chief Executive Officer (CEO) takes the lead and is expected to make all final decisions. That’s just the startup norm.
However, should the CEO not be transparent with his decisions or fails to get buy-in from his co-founders, it can also negatively impact the team.
No founder will want to continue to work their best if their opinion isn’t taken into account when making decisions. I know because I have seen this firsthand.
I was working with a two-person founder team where the CEO would make decisions without his founder’s input, the Chief Technology Officer.
Over time, the CTO got resentful and felt like everyone in the company would come to him to better understand the decisions the CEO was making. At the time, they lead a team of twenty employees. While the CEO and CTO both agreed that they would stay in their respective lanes and execute decisions within their domain, the lack of transparency and information sharing regarding bigger business decisions was causing strife between them — and also started negatively affecting the business. It got so bad that the CTO threatened to quit.
Don’t be like this team. To create a decision-making process, think about the following questions:
1. Are founders allowed to make unilateral decisions under their domain/role?
2. Are major product or company decisions debated and dialogued about collaboratively?
3. Are founders expected to get behind decisions they don’t agree with?
💡 Pro Tip: Founder teams must navigate many unknowns and risks. Sometimes there is no clear right or wrong path to take. Keep this in mind when making your decisions and use frameworks, benchmarks, etc. when possible.
I advise clients to create a decision-making framework that allows the founders to evaluate how risky a potential decision is versus what the probability of it happening is. Much like the below:
When evaluating a decision, this framework creates structure and clarity into how they’ll proceed as a team when inevitably someone feels passionate about a potential decision but there isn’t a clear yes or no either way.
This way, impassioned ideas do not get personalized into unnecessary conflict and sound business decisions can be made.
A Quarterly Realignment Process to Address Change & Disagreement
Once a quarter, usually when teams are reviewing and setting the next quarter’s goals, teams should also take the opportunity to air out any concerns through a realignment process.
This process creates an intentional space where founders all agree to look at past performance and give feedback openly without fear.
The process should include:
- The values underlying the conversation
- A model and expectations for giving and receiving feedback
- Steps to break any impasse (should it occur)
- Memorializing the conversation and next steps via an email, a Google doc, or some other method so you can look backward to see what was agreed
Everyone should also agree that while you are using the quarterly realignment process, the values and expectations that were agreed upon before are not open to change.
This will ensure that the process is used in the way that it should be — to address change — while keeping things moving forward.
A Formal Conflict Resolution Process
Lastly, when realignment efforts fail and the team is having major conflict, a formal conflict resolution process included in their founder agreement can be a last-ditch effort to save the relationship and the business.
A formal conflict resolution process should have multiple steps:
Step 1: Informal Discussion to Find a Solution
The founders should all discuss the problem openly, anchored in their values. Whatever the problem is, think about how the values come alive during the discussion and any decision you all ultimately make.
Step 2a: Take a Vote as a Founder Team
If Step 1 does not yield any result, take a vote as a team. In two-person teams, this obviously results in a deadlock. In three or four-person teams, a vote can break an impasse, but you must ensure everyone agrees with the decision afterward. This can be the hardest thing about this step.
Step 2b: Involve a Third Party
This can be your board of directors, an advisor, or someone that everyone trusts. Here, concentrate on getting an outside perspective on the problem and how to move forward amicably. Be mindful, though, that a board of directors may have specific interests in mind (such as safeguarding the company) that could impact their outside perspective.
Step 3: Hire a Mediator or an Executive Coach
The last step of the conflict resolution process ensures that should there be no agreement, an outside party that is an expert in working with startup teams is brought in to help move things along.
💡 Sample Language: Should we have a problem, issue, or otherwise can agree on a decision, we, the founding team, decide to do the following:
Step 1: Informally Negotiate Amongst Ourselves to Arrive at a Mutually Acceptable Decision
Should Step 1 not yield a positive result, we will either as part of Step 2 in this conflict resolution process: 1) Take a non-binding vote as a founding team to decide on whether or not we can agree on next steps together; or 2) Involve an outside third party, such as a member of the board, an advisor, or someone we all mutually trust to help us break any impasse or deadlock
And should Step 2 not yield a positive result, as a last ditch effort, we agree that Step 3 will involve contracting a mediator or executive coach with expertise working with startup teams to help us move forward constructively.
Optional Step: Arbitration
Some teams may benefit from having the last step within their founder agreement that any such disputes that arise will be submitted to binding arbitration. What that means is that once submitted, the agreed-upon arbitrator will ultimately make a decision that is binding.
The pros of adding this provision are that it removes the threat of litigation, while an obvious con is that it removes the ability to self-determine the end result.
Choose for yourself and your team what might be more appropriate for your situation.
Bottom Line
Startups are risky businesses.
Your founder team will have to execute in an environment that has a lot of uncertainty. Making sure you all stay high-performing is ensuring that you have the key provisions in your founder agreement that you can rely on if and when things do go south.
It may just save your company and, most importantly, your business relationship too!
Who am I & why should you listen to me?
I am a mediator and executive coach that works with seed-funded to Series B startup teams and founders in the areas of communication, collaboration, and conflict resolution.
I specialize in resolving co-founder disputes, developing leadership communication, and optimizing collaboration on teams through neuro-science-based tools and techniques.
I also have had the privilege of working with the United Nations, Union Bank, and the University of Phoenix in creating large-scale conflict resolution training. You can check out my company website, www.collabshq.com, to learn more about what I do.
