“Startups aren’t destroyed by bad ideas - they’re destroyed by misaligned founders. Document your alignment, or prepare for disaster.”
- Matt Glynn

Misaligned expectations between co-founders is the silent killer of many promising startups. 

One minute you’re brainstorming late into the night over pizza, the next you’re in litigation over IP ownership or equity splits. 

If you don't clearly document your alignment from day one, you're building your rocket ship on a fault line.

Legal issues like this are easy to overlook. The thrill of launching, building your product, and investing in marketing always feels more urgent than “legal housekeeping.” 

But if you think you can ignore this one until “later,” you’re walking blindfolded into a minefield. Let’s fix that.

In this “start up stage review”, we’re going to flag up some considerations to help you better prepare to tackle this part of your start up journey - before it tackles you.

“We’re friends, we’ll work it out” is not a strategy

The Founders Agreement stage is an important stage of the start-up journey because:

◼️Alignment Tool: it ensures founders share the same vision, values, and goals from day one.

◼️Equity Clarity: it establishes who owns what, how much, and under what conditions.

◼️IP Ownership: it defines who owns what IP - including what’s brought in and what’s created.

◼️Decision Rights: it sets out who gets to decide what - and how disagreements are resolved.

◼️Commitment Expectations: it outlines what each founder is expected to contribute (time, cash, skills).

◼️Exit Strategy: it determines what happens when someone wants out - or gets kicked out.

◼️Vesting Mechanics: it enables equity to be earned over time, avoiding free-rider issues.

◼️Investor Readiness: it shows maturity to future investors and reduces red flags during due diligence.

◼️Legal Foundation: it sets out key legal boundaries even before formal incorporation.

◼️Relationship Safeguard: it provides a framework that protects relationships from unnecessary stress.

The consequences of not attending to this issue may include the following: 

1. Legal Implications

◼️IP Disputes: ownership of code, branding, or other assets might be unclear - and legally contested.

◼️Equity Challenges: lack of documented ownership could void or complicate share allocations.

◼️Compliance Risks: failure to clearly delineate legal obligations between founders may breach regulatory requirements, particularly where pre-incorporation activities are involved.

2. Founder Relationship Issues

◼️Trust Breakdown: verbal agreements breed misunderstandings that can destroy personal and professional relationships.

◼️Resentment Builds: unequal efforts without compensation mechanisms can lead to toxic dynamics.

◼️Exit Chaos: no agreed mechanism for dealing with a departing founder causes disruptive exits.

3. Commercial Implications

◼️Investor Rejection: unclear founder dynamics and undocumented equity split will repel serious investors.

◼️Unfundable Team: founders at legal or personal odds become unbackable, no matter the product.

◼️Client Concerns: customers, especially in B2B markets, may hesitate when founder stability is in question.

4. Operational Implications

◼️Decision Gridlock: unresolved roles and decision rights paralyze key business functions.

◼️Poor Execution: unclear contribution expectations lead to gaps in delivery and missed opportunities.

◼️IP Access Issues: no documented IP rights = potential inability to exploit key business assets.

5. Biz Valuation Issues

◼️Down-round Penalty: investors will discount your valuation to account for founder misalignment risk.

◼️Transaction Failures: M&A and secondary share transactions will be delayed or abandoned if ownership and rights are unclear.

◼️Dilution Landmines: unclear ownership stakes = unpredictable dilution consequences later.

The above lists are indicative issues - the relevance of which will depend on your circumstances, including the nature of business undertaken by your start up.

“Map the Relationship Before You Navigate the Journey”

We’ve identified quite a number of potential issues that the start-up needs to consider and below are some examples of the types of steps you might want to consider taking to address these issues considered above.

1. Create a Founders Agreement

◼️Clearly document the founders’ roles, responsibilities, and equity arrangements.

◼️Address IP ownership, decision-making authority, and dispute resolution. 

2. Include Vesting Provisions

◼️Define how and when equity is earned (e.g., over 4 years with a 1-year cliff).

◼️Protect the business from “walk-away” co-founders. 

3. Agree on Capital Contributions

◼️Document any money, assets, or services each founder is expected to contribute.

◼️Clarify whether these are loans, equity contributions, or sweat equity.

4. Set Dispute Resolution Mechanisms

◼️Establish internal escalation processes before resorting to legal action.

◼️Include mediation/arbitration clauses to preserve relationships. 

5. Integrate with potential Shareholders’ Agreement

◼️Ensure the Founders Agreement aligns with - or complements - any SHA signed later.

◼️Avoid contradictions that create enforcement gaps.

6. Regularly Review and Update

◼️Revisit the agreement at major milestones (e.g., funding rounds, new hires).

◼️Ensure it remains relevant as the business evolves.

The above suggestions are just a few of the steps you can consider taking. 

There are many more things that need to be done to ensure the associated risks are effectively and pragmatically dealt with.

We’re not trying to be alarmists and go so far as to say that some of the legal risks we have flagged may never materialise for your business - but others can hit like a freight train. 

The key point is awareness - just have a think about the issue - know that it exists and decide for yourself what you want to do.

Yes, we know you're juggling limited time, money, and human bandwidth. Sometimes ignoring a legal risk might even make sense - providing doing so is not illegal.

However, “Knowledge” has always been your greatest asset and know you have the GLS Knowledge Centre to help fill in details about the start up journey.

Let’s look at how things can go sideways:

Case Study 1: “The 50/50 Fall-Out”

Two friends co-founded a social media analytics tool. No Founders Agreement. When one wanted to leave and the other demanded full IP rights, chaos ensued. They spent $50k in legal fees sorting out who owned what - and missed their funding round.

Case Study 2: “The Ghost Co-Founder”

A third founder who left after three months retained 33% equity because nothing was ever agreed on vesting. He did nothing while two others built the company, then popped up demanding his share when the startup hit $3m in ARR.

Case Study 3: “The Investor Bailout”

A VC firm withdrew a $1.2m offer after due diligence uncovered that the startup’s two founders disagreed on who had contributed what - and didn’t have an agreement to sort it. The business never recovered.

As a start-up operator you may not be familiar with legal jargon. As you navigate this stage of your start-up journey – you might encounter the following legal definitions:

◼️Founder: one or more of the principals who together “found” the business and who will enjoy ownership right.

◼️Founders Agreement - A private agreement between individuals agreeing to co-found a business, used to align on ownership, roles, responsibilities, and future scenarios, including exits and IP rights.

◼️Vesting Schedule - A mechanism that allows equity or rights to be earned over time or upon achievement of certain milestones, protecting the business from premature exits.

Watch out for the legal jargon and refer to the knowledge hub for an extensive legal dictionary that you can access at any time:
https://www.gls-startuplaw.com/legal-ops-terminology

If this is your dream business, you need to protect it like one.

Skipping a Founders Agreement isn’t “saving time” - it’s taking out a loan against your future sanity. 

The good news? These risks are not new, and the answers are well understood. GLS can help you navigate this terrain and avoid the traps that have crippled countless startups before you.

Document your alignment. Protect your relationships. Build your business on solid ground.

GLS may well be able to help you navigate the issues associated with the Founders Agreement stage. 

Few, if any, integrated legal solution providers have made themselves as accessible to the start-up community as we have.

Consider engaging with GLS via any of the following means:

◼️GLS Start Up Centre: visit our world-leading start-up legal support resource - we might have a solution “ready to go” available to you at a fraction of the cost - visit www.gls-startuplaw.com

◼️GLS Knowledge Hub: check out the knowledge hub for more information on this issue to learn more about what you need to do
https://www.gls-startuplaw.com/blog

◼️GLS Support Plan: consider engaging your own in-house legal team capability with a highly disruptively priced GLS Start Up Support https://www.gls-startuplaw.com/plans

◼️GLS Legal On Call™: trial GLS Legal On Call™ for free - access up to 3 free in-house legal consults and feel the power of your own “on call” legal team https://www.gls-startuplaw.com/product/gls-legal-on-call-free-trial

◼️Book A Consult: book a complimentary one-off 15 min consult via our e-calendar
https://calendly.com/globallegalsolutions/startup-free-legal-consultation?month=2025-03

◼️GLS Start Up Clinic: join our next pro bono start-up clinic for an in-person free consult - book here.