Co Founder Partner Agreements

SKILL 71: Co-Founder & Partner Agreements

Purpose

The #1 startup killer is co-founder disputes. The right legal documents, executed before a line of code is written, prevent most of them.

Founders' Agreement (Pre-Incorporation)

A simple document covering the essentials before the entity is formed:

• Who contributes what: money, labor, IP, connections, time commitment
• Initial equity split and basis for the split
• Vesting schedule (see below)
• IP assignment: all work done for the venture belongs to the venture
• What happens if someone wants to leave
• Decision-making: who has final authority on what?

Do this BEFORE writing any code or spending any money.

Operating Agreement (LLC) or Bylaws + Stockholders Agreement (C-Corp)

Governance

• Decision-making authority: who can bind the company?
• Voting thresholds: simple majority vs. supermajority for specific decisions
• Board composition: how many members, how elected, how removed
• Manager/officer roles: CEO authority vs. board authority

Equity

• Initial allocation: percentage ownership at formation
• Vesting schedule (see below — non-negotiable)
• Dilution on future fundraising: pro-rata rights to maintain ownership percentage

Distributions (LLC) / Dividends (C-Corp)

• When and how profits are distributed
• Minimum tax distributions (for LLCs: distributions to cover members' tax liability)
• Board discretion on timing and amount

Transfer Restrictions

• Can a co-founder sell their shares? To whom?
• Right of first refusal (ROFR): company gets the right to buy before any third party
• Co-sale right (drag-along/tag-along): if one founder sells, others can join the sale
• Company repurchase right on departure

Deadlock Resolution

• If 50/50 co-founders reach an impasse:
  1. 30-day cooling off period
  2. Mediation (neutral mediator)
  3. Binding arbitration
  4. Buy-sell mechanism (Texas Shootout: one party sets price, other chooses to buy or sell at that price)

Non-Compete

• Scope: specifically in the company's defined business
• Duration: during involvement + 12–24 months after departure
• Geography: US (or wherever the company operates)
• Enforceability: Iowa enforces non-competes if reasonable in scope/duration/geography
• Note: California does NOT enforce non-competes — if a co-founder is based in CA, this may be unenforceable

Vesting — NON-NEGOTIABLE FOR ALL EQUITY HOLDERS

Standard Terms

• Schedule: 4 years total, 1-year cliff
• The cliff: zero vesting for the first 12 months. Leave in month 11: zero equity.
• After the cliff: monthly vesting (1/48th per month for remaining 36 months)
• Result: co-founder who leaves at month 18 keeps 18/48 = 37.5% of their grant

Acceleration

• Single-trigger: all shares vest immediately upon acquisition
  • Protects the individual; more expensive for acquirer
  • Appropriate for: CEO/founder who drove the exit
• Double-trigger: shares vest only if acquired AND person is terminated without cause within 12 months
  • Protects the company/acquirer; standard for non-CEO employees
  • Recommendation: single-trigger for Nick (CEO), double-trigger for everyone else

Founder Vesting (Yes, Even Founders Vest)

• Founders must vest. A co-founder who leaves after 3 months with 50% of the company is a company-killer.
• Common objection: "I started this company, why should I vest?"
• Answer: "Because if you leave tomorrow, you shouldn't take half the company with you. Vesting proves your commitment."
• VC requirement: ALL investors will require founder vesting before investing

IP Assignment Agreement

Sign with EVERYONE who touches the product. No exceptions.

Required signatories:

• All founders (at incorporation)
• All employees (at hire)
• All contractors (before first deliverable)
• All advisors (before first engagement)

Required Provisions

1. Assignment of all IP created in connection with the company to the company
2. Covers: code, designs, inventions, trade secrets, content, processes, improvements
3. Includes work done before the formal agreement IF done for the company's benefit
4. Pre-existing IP: list anything retained by the individual (Nick's personal tools, prior inventions)
5. Moral rights waiver (relevant for non-US IP)
6. Power of attorney: the company can register IP in the person's name without their further signature if they're unavailable

Without this: each person could claim they own their contributions. In acquisition due diligence, missing IP assignments kill deals or dramatically reduce price.

Advisor Agreements

• Typical equity: 0.25%–1.0% with 2-year vesting, monthly, no cliff
• FAST Agreement: Founder Advisor Standard Template (fi.co/FAST) — industry standard, freely available
• Advisor provides: introductions, strategic guidance, industry expertise — NOT day-to-day work
• Advisory board ≠ Board of Directors: advisors have no fiduciary duty, no legal authority, no liability
• Cap on advisors: don't give out advisory equity casually. 5–7 advisors maximum before it starts to look like equity is being used as currency.

Early Employee Equity

• First 5 employees: typically 0.5%–2.0% each with 4-year vesting
• Option pool: reserve 10–20% of total shares before first raise (standard for VC-backed companies)
• ISOs vs. NSOs: Incentive Stock Options (ISOs) for employees (favorable tax treatment); Non-Qualified Stock Options (NSOs) for contractors and advisors
• 83(b) election: for restricted stock grants (not options). File within 30 DAYS of grant. Miss this deadline: NEVER fixable. Set a calendar reminder the day of every grant.
• Token allocation: separate from equity. Specify in employment agreement if the company has or plans to have a token.

This is legal research and intelligence, not legal advice. Consult qualified legal counsel before taking action.