Equity split, defined roles, vesting schedule, and what happens if someone leaves — or gets pushed out. The co-founder agreement most early-stage companies never sign until they have to.
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What's happening here
Co-founders start with energy and alignment. They end — sometimes — with fundamental disagreements about ownership, control, and what someone is owed when they leave. The absence of a written agreement makes every one of these disputes worse and more expensive.
Two or more people are building a company together. They've agreed on the vision. They may have agreed on the equity split. But the agreement isn't written down — and the specific terms of what happens when one person wants out, gets bought out, or stops contributing haven't been discussed at all.
Co-founder disputes are one of the top reasons early-stage startups fail — not because the business is bad, but because the founders couldn't resolve the interpersonal math. Vesting, buyout pricing, decision authority, and IP ownership are the four areas where undocumented assumptions become expensive legal fights.
A co-founder who leaves in month 3 retaining their full 50% equity stake with no vesting. A founder who built the core IP before the company was formed claiming personal ownership of it. A 50/50 split where one founder wants to sell and the other doesn't — with no mechanism to resolve the deadlock. All of these are real, common, and preventable.
The right agreement for this situation
The co-founder agreement governs equity, roles, and exits. The IP assignment ensures everything built before and during the company belongs to the company — not to individual founders.
The relationship
Defines equity split, capital contributions, decision-making authority (voting thresholds, deadlock mechanism), founder roles and responsibilities, compensation during early stage, vesting schedule, buyout triggers and pricing methodology, and dissolution procedures. The foundational document for any multi-founder company.
The assets
Any pre-incorporation work — code, designs, concepts, business processes — that founders contributed to build the company should be formally assigned to the entity. Without this, a departing founder may claim ownership of the IP the entire company depends on. This is one of the first things investors look for in due diligence.
For incorporated entities
For C-corps or S-corps, a shareholders' agreement governs the relationship between founders as shareholders — right of first refusal on share transfers, drag-along and tag-along rights, anti-dilution provisions, and board composition. A partnership agreement is for general/limited partnerships; a shareholders' agreement is for corporations.
What BizDraft asks you
Names, ownership percentages, and basis for the split. Is it equal? Is it contribution-weighted? Is there a sweat-equity vs. cash-equity distinction? This is the foundational number that everything else builds on.
Cash investment, IP contributions, domain expertise, client relationships. What each founder brings in defines whether the equity split is proportional — and shapes the IP assignment and capital contribution clauses.
4-year vest with 1-year cliff is the standard for most startups. Vesting protects remaining founders from an early departure that leaves a passive co-owner holding significant equity. BizDraft drafts any vesting schedule you specify.
Majority, supermajority, or unanimous for major decisions (fundraising, hiring, acquisitions, dissolution). A 50/50 split requires a tie-breaking mechanism — define it now or face gridlock later. BizDraft includes the mechanism you choose.
Voluntary resignation, death or disability, material breach, or cause-based removal. The buyout price — book value, fair market value, formula-based — and payment timeline. This clause is what makes the exit process predictable instead of litigious.
State of formation or primary operations. Delaware is common for venture-backed startups due to its well-developed corporate law, but most small business co-founder agreements use the founders' home state.
What to watch out for
50/50 is fair in concept. In practice, it means every major disagreement is a tie. Without a defined tie-breaking mechanism — a tiebreaker founder, a required arbitration process, or a deadlock buyout trigger — equal splits become operational paralysis when the relationship strains.
Unvested founder equity is the most expensive mistake in startup formation. A co-founder who leaves after 6 months keeping their full equity stake becomes a passive shareholder who owns a significant piece of a company they're no longer contributing to — creating dead weight in every future financing round.
If one founder built the core technology before the company was incorporated, that IP belongs to the founder — not the company — unless it's formally assigned. Investors will check this in due diligence. A departing founder who personally owns the company's core IP is a fatal cap table problem.
A co-founder who leaves and immediately starts a competing company — taking clients, employees, or IP — is a real risk. A post-departure restriction clause (properly scoped for the state) protects the remaining founders from this scenario.
The time to draft the agreement is when you fully trust each other — not after a dispute. The document isn't an expression of distrust; it's an operating agreement that makes the relationship more durable. Every co-founder who later wishes they had a written agreement made this mistake.
Example
What you tell BizDraft
"Two co-founders building a B2B SaaS startup. 55/45 split — I'm putting in $30k seed capital, my co-founder is the technical lead. 4-year vest, 1-year cliff, both. Majority vote for most decisions, unanimous for fundraising. Deadlock: buy-sell provision. 18-month non-compete and non-solicitation post-departure. Delaware."
What BizDraft generates
A co-founder agreement with 55/45 equity, $30k capital contribution, 4-year/1-year cliff vesting for both, majority decision-making standard with unanimous fundraising carve-out, buy-sell deadlock mechanism, pre-company IP assignment, 18-month non-compete and non-solicitation, Delaware governing law.
Download options
Word and PDF. Adjust vesting cliff, buyout formula, or decision thresholds inline before signing. A starting point that handles 90% of co-founder scenarios in a single document.
Frequently asked questions
Sign the co-founder agreement first — it defines the terms that will be embedded in the operating agreement or shareholders' agreement when you incorporate. The co-founder agreement also covers the pre-incorporation IP assignment, which needs to happen before the entity exists to receive the assignment.
A buy-sell (or "shotgun") provision is a deadlock-resolution mechanism: either founder can trigger it by naming a price, at which point the other founder must either buy at that price or sell at that price. It creates a strong incentive to name a fair price and effectively resolves deadlocks without litigation.
There's no universal standard, but 50/50 and 60/40 are common for two co-founders with comparable contributions. The most important thing isn't the split itself — it's that both founders feel the split is fair, understand why, and have documented the reasoning. Undocumented assumptions about "what we agreed" are the source of most co-founder disputes.
A co-founder agreement covers the founder relationship. If you raise VC funding, you'll need additional documents — a term sheet, shareholders' agreement, and amended cap table. BizDraft's co-founder agreement is a starting point; a startup attorney should be involved for any institutional financing round.
Draft the co-founder agreement while everyone still agrees on everything.
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