Founders’ Agreements

Historically, at least 50% of startups fail in their early years. And of that 50%, 65% fail because of conflict between the founders.

Traditionally, all that founders had to regulate their conflicts was a shareholder’s agreement, and a shareholder agreement really didn’t do much to help. That was especially the case after a VC had invested, at which point the shareholder’s agreement become mainly about protecting the VC’s investment.

But it doesn’t have to be like that. It’s quite possible to put in place an agreement between founders which gives the founders an agreed structure to work within, which sets clear expectations and boundaries, and which provides a means for resolving disputes.

A good founders’ agreement will typically deal with the following issues:

·       The vision and strategy for the business, including the desired exit strategies (sale, IPO, etc)

·       The founder’s roles

·       How much time and/or resources each founder will put into the business

·       The extent to which each founder can have side projects or be involved in other businesses

·       Principles of how the business is run, including financial management

·       How decisions are taken in important issues like funding, hiring, firing, strategy

·       How disputes are escalated and resolved, including mediation

·       Exit strategies if you can’t resolve disputes.

A founders’ agreement is not a magic bullet. It won’t prevent conflicts from happening, but it will provide a structure to hold them and increase the chances of a useful resolution.

25 March 2025