How to agree ownership, vesting and leaver terms with your co-founders.

This is general information, not legal advice. Shareholder arrangements interact with tax, so involve both a solicitor and an accountant before you sign.

Why it matters

Co-founder break-ups are common, and the most damaging outcome is a departed co-founder holding a large, permanent stake while contributing nothing. That makes the company harder to fund, because investors want equity held by the people building the business, and it breeds resentment among those who stay. A shareholders’ agreement, combined with the right provisions in the articles of association, settles these questions while everyone is still on good terms.

What a co-founder agreement should cover

• Who owns what. The number and class of shares each person holds, and that they paid for them (often nominal value). Model it in the cap table and dilution simulator so everyone sees how future rounds and an option pool dilute them.
• Roles and time commitment. Who does what, who is full-time and from when. A part-time co-founder should not have the same terms as a full-time one.
• Vesting. Shares are issued up front but can be bought back if a co-founder leaves early. A common pattern is four years with a one-year cliff. That is a rule of thumb, not a requirement; credit for time already put in is common.
• Leaver terms. Good leaver and bad leaver definitions set the price at which unvested (and sometimes vested) shares are bought back. Keep bad leaver narrow, such as gross misconduct or breach of restrictive covenants, so the clause is seen as fair and is more likely to stand up.
• Reserved matters. Decisions that need a co-founder majority or unanimity, such as issuing shares, taking on debt or selling the company.
• Deadlock. What happens if two equal co-founders disagree, for example a cooling-off period followed by mediation.
• Transfers. Pre-emption rights, drag-along and tag-along, so no one can sell to a stranger and a sale cannot be blocked by a small holder.
• IP and restrictive covenants. Confirmation that each co-founder has assigned their IP to the company, plus reasonable non-compete and non-solicit terms.

Step by step

1. Have the conversation using a written list of the points above. Agree principles before anyone drafts.
2. Write a one-page term summary in plain English and have each co-founder confirm it.
3. Ask a solicitor to turn it into a shareholders’ agreement and, where needed, amended articles. Leaver and transfer provisions often belong in the articles so they bind future shareholders too.
4. Speak to an accountant about the tax side. Shares that can be bought back on leaving may be restricted securities, and a tax election (often called a section 431 election) is commonly signed with a short deadline after the shares are acquired.
5. Pass the board and shareholder resolutions, update the registers and file at Companies House.
6. Revisit at each funding round, as investors will usually replace the agreement with a new one that reflects the term sheet.

Worked example

Ferrow Labs, a Bristol logistics software company, has three co-founders: a full-time CEO and CTO, and a part-time commercial co-founder. They agree 40/40/20 with four-year vesting and a one-year cliff, with six months’ credit for the time already spent. The commercial co-founder takes a job elsewhere after 14 months. Because the agreement defines this as a good leaver, the company buys back the unvested shares at nominal value and she keeps her vested shares. The conversation is uncomfortable but short, and when Ferrow raises its pre-seed round six months later the investor sees a clean cap table.

Common mistakes

• Splitting equally by default to avoid a hard conversation, then having no deadlock mechanism.
• Using a downloaded template with leaver clauses that conflict with the articles.
• Defining bad leaver so broadly that it reads as a penalty.
• Forgetting the tax election, which can create an income tax problem later.
• Promising advisers equity without vesting or a written agreement.

What to measure

• Share of the company held by people actively building it, now and after the next round.
• Whether every shareholder has signed the current agreement.
• Time since the agreement was last reviewed against reality.