Legal protections for early stage teams
A co-founder equity agreement typically combines a shareholders' agreement with vesting terms, IP assignment, and decision-making rules. It exists to protect the company and remaining founders if one co-founder leaves, becomes incapacitated, or turns out not to be a good fit, which is also why founder vesting sits alongside it.
- Equity split and share class
- Vesting schedule and cliff
- IP assignment clause covering work done before and after incorporation
- Good leaver versus bad leaver definitions and consequences
- Decision rights: what needs unanimous consent versus majority
- Roles and titles, and a process for resolving deadlock
Transferring intellectual property to the startup
Any code, designs, or product work built before the company was incorporated does not automatically belong to the company. Each founder should sign an IP assignment agreement transferring pre-incorporation work product to the company, otherwise a departing founder could later claim rights over core assets. See cap table basics for the mechanics.
This is especially important if a founder built an early prototype using a personal laptop or freelance contract before the company existed.
Consequences for founder departure from the business
| Leaver type | Typical trigger | Typical outcome |
|---|---|---|
| Good leaver | Death, illness, redundancy, mutual agreement | Keeps vested shares, sometimes at fair value |
| Bad leaver | Resignation without cause, gross misconduct, breach | Forfeits unvested shares, vested shares bought back at nominal or low value |
The precise definitions and buyback prices are negotiated case by case, but the concept protects the company from a founder who leaves early yet keeps a large ownership stake with no ongoing contribution.
Optimal timing for formal founder agreements
The best time to sign a co-founder equity agreement is at incorporation, before any tension has built up and before an investor asks to see it during due diligence. Investors routinely check that founder shares are subject to vesting before committing to a round.
Questions on putting a co-founder deal in writing
- Do co-founders need a separate agreement from the articles of association?
- Usually yes. Articles govern the company generally, while a shareholders' agreement covers founder-specific terms like vesting and leaver provisions.
- What happens to unvested shares if a co-founder leaves?
- Unvested shares are typically forfeited or bought back by the company at nominal value, returning them to the option pool or treasury.
- Can a co-founder agreement be changed later?
- Yes, with the consent of the parties involved, though changes become harder once outside investors hold shares and consent rights.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.