Founders split equity in a conversation, incorporate, and get on with building. Two years later one of them wants out, or stops contributing, or gets a job offer — and there is nothing on paper that says what happens to their thirty percent. That thirty percent then sits on the cap table permanently, held by someone who no longer works there, and it makes the company very difficult to fund.
The clause that matters most
Vesting. It says that founder equity is earned over time rather than owned outright from day one — typically over four years with a one-year cliff, meaning nothing vests if you leave inside the first year and the rest accrues monthly or quarterly after that.
Founders resist this because it feels like distrust between people who trust each other. It is the opposite. Vesting is what protects the founders who stay from the one who leaves, and every investor will insist on it later anyway — usually resetting the clock, which is far more painful than having done it at the start.
What else the document has to settle
- Equity split, and what each founder is contributing to earn it — capital, time, IP, customers.
- Roles and decision rights, including which decisions need unanimity and how a deadlock breaks.
- Time commitment. Full-time or not, and what happens if someone takes other work.
- Good leaver and bad leaver treatment, and the price at which the company can buy back unvested or forfeited shares.
- Transfer restrictions, so a founder cannot sell to an outsider without offering the others first.
- IP assignment, so everything built for the company belongs to the company and not to an individual.
- Non-compete and non-solicit, drafted narrowly enough to be reasonable.
Put it in the Articles too
This is the technical point most templates miss. A founders agreement binds the people who signed it. Restrictions on share transfer only bind the company — and are only enforceable against a third party — if they also appear in the Articles of Association.
So a right of first refusal that exists only in a side agreement can be breached by a founder selling to an outsider, leaving you with a damages claim rather than the ability to stop the transfer. Mirror the key terms into the Articles when you incorporate, or amend them shortly after.
If you are already past this point
It is not too late, but it gets harder. Signing an agreement now requires everyone to agree while they can each see how it would apply to them — which is exactly the calculation the document is meant to pre-empt. Do it anyway. It is still far cheaper than the alternative, and it is the first thing a serious investor will ask for.