Founders Agreement Generator
Scope & Purpose
This article explains the legal theory and real‑world pragmatics behind the Founders Agreement Generator below. It is written for serious entrepreneurs who want to implement best‑in‑class protections without drowning in jargon.
1 Why a Founders Agreement Matters (Even if You Already Have Bylaws or an Operating Agreement)
For many first‑time founders, the launch sequence looks like this:
- Idea → GitHub repo → Pitch deck.
- Handshake over equity percentages.
- Draft “delaware_corp_certificate.txt” at 2 a.m.
- Raise $50 k from friends & family.
- Realise that the original handshake had gaps big enough to drive a Series‑A term sheet through.
A Founders Agreement closes those gaps before institutional money arrives and forces a retrofit. Unlike an Operating Agreement (LLC) or Corporate Bylaws, the Founders Agreement is laser‑focused on the personal relationship and risk allocation among the human beings who launch the company.
1.1 Risk Categories a Founders Agreement Mitigates
| Risk Category | Without Agreement | With Robust Agreement |
|---|---|---|
| Equity Drift | Disputes over “sweat equity” after one founder reduces effort. | Vesting & milestone‑based cliffs cap free‑rider exposure. |
| IP Leakage | Code and trade secrets remain in the personal GitHub of a departed founder. | Present assignment clause + further‑assurances language. |
| Decision Deadlock | Equal 50/50 voting freezes product roadmap. | Weighted or role‑based tiebreakers unblock decisions. |
| Exit Chaos | No mechanism for buying out a quitting founder. | Repurchase options tied to FMV and good‑/bad‑leaver triggers. |
| Regulatory Surprise | California non‑compete ban renders clause void. | State‑specific carve‑outs preserve enforceability. |
2 Generator Walk‑Through: Each Section and the Law Behind It
Below I correlate every major panel of the generator with the statutory or contractual doctrine it implements. Use this as a legal checklist while you fill the fields.
2.1 Company Information
- Business Purpose & Address: Rule §1.501(c)(3)‑1(d)(2) for nonprofits; §2115 CA Corps Code for pseudo‑foreign corps.
- Incorporation Status toggles downstream terminology—”Membership Interests” for LLCs, “Common Stock” for C‑Corps.
- Governing Law: Internal Affairs Doctrine lets Delaware law follow the entity worldwide—unless you remain an unincorporated partnership, in which case each founder’s domicile law may apply to fiduciary duties (see VGS, Inc. v. Castiel, 2003).
2.2 Founder Blocks (Name, Equity, Role)
The generator builds a JSON array of founders and maps it into:
- Recitals—full legal names for signature validity under UETA/E‑Sign.
- Equity Table—used later by weighted voting and buy‑sell math.
- Role & Responsibilities—evidence for securities regulators that stock was issued for bona‑fide consideration, not for free (Reg D §502).
2.3 Equity & Vesting
| Option | Default Logic | Legal Commentary |
|---|---|---|
| Common vs Preferred | Preferred disabled until a priced round is likely. | Avoids triggering §1201 CA Corps Code cumulative‑dividend rules prematurely. |
| Standard 4‑Year / 1‑Year Cliff | 25 % cliff + monthly vest | Mirrors NVCA precedent; safe harbor for 83(b) elections. |
| Acceleration | Single‑trigger at Change‑of‑Control | California Labor Code §2860 (inventions) + investor pushback: consider double‑trigger after Series A. |
Tip When you select “Future Equity upon Incorporation,” the generator inserts a Section 3.5 SAFE Conversion Provision so that pre‑incorp promises become binding on the post‑incorp cap table.
2.4 Roles & Commitment
- Decision Making: Majority vs unanimous vs equity‑weighted.
Caution: Equality sounds fair but courts look to course of dealing to infer implied authority (Holzman v. De Escamilla, 1948). Put it in writing. - Time Commitment: Defines consideration supporting non‑compete clauses outside CA.
- Salary Toggle: Paying no salary can re‑characterise founders as volunteers under wage‑hour law—safe if truly exempt officers but watch FLSA.
2.5 Intellectual Property Assignment
The template uses a present assignment (“hereby assigns”) rather than a promise (“will assign”), complying with Stanford v. Roche (U.S. Sup. Ct. 2011). Limited or licence options are for professors / open‑source contributions where blanket assignment is impossible.
2.6 Restrictive Covenants
- Non‑Compete: Disabled by default if governing law = California, per Bus.&Prof. Code §16600. For non‑California, generator injects blue‑pencil clause.
- Confidentiality: DTSA 18 U.S.C. §1836 whistle‑blower notice included automatically.
2.7 Exit & Termination
- Good vs Bad Leaver: You can repurchase vested equity at FMV or nominal depending on cause. The template’s macro variable
@ValuationMethodinfluences whether a tax §409A valuation is required. - Founder Termination Mechanisms: Majority / Supermajority mapping to Del. §141(k) board removal power if already incorporated.
- Dispute Resolution: AAA vs JAMS; generator auto‑fills seat of arbitration as principal place of business.
3 Deep‑Dive: Advanced Legal Issues You Can Toggle in the Generator
3.1 83(b) Elections and Vesting Start Date
Elect to apply §83(b) within 30 days of stock issuance. The generator’s PDF annexes an election form per IRS Rev. Proc. 2000‑45 and reminds each founder by email (if email field present). Failure means founders recognise income on each vesting date at FMV, a nightmare if valuation spikes.
3.2 Implied Fiduciary Duties in Unincorporated Pre‑Formation Teams
Until you file with the state, you are partners under the Uniform Partnership Act. Partners owe each other fiduciary duties of loyalty and care. Our template’s Waiver & Ratification clause converts pre‑incorp IP contributions into corporate property to avoid derivative suits.
3.3 International Founders
If any founder resides outside the U.S., two extra clauses appear:
- Export Control acknowledgment (EAR §734) for dual‑use technology.
- Tax Residency Disclosure so the company can satisfy Form 5472 reporting if >25 % foreign‑owned.
3.4 Tokenised or DAO‑Based Equity
Selecting “Future Equity” + “Custom Acceleration” unlocks Annex D Digital Asset Clause—a Wyoming DAO wrapper with smart‑contract based vesting. Use cautiously; SEC treatment as securities is unsettled (see SEC v. Ripple, 2023).
4 Best Practices for Using the Generator in Fund‑Raising Contexts
- Pre‑Seed SAFE – Investors will request a Capitalisation Table. The generator’s equity JSON can be exported to CSV for Carta.
- Series A Due Diligence – Lawyers look for board consent on founder salaries. Make sure Section 4.4 matches payroll reality.
- Convertible Notes – Add a subordination clause so founders’ repurchase rights don’t rank above noteholders in liquidation.
5 Common Drafting Mistakes (and How the Generator Prevents Them)
| Mistake | Resulting Litigation | Generator Safeguard |
|---|---|---|
| Vesting dates left blank | IRS views stock as fully vested – founders hit with large tax bill | Mandatory date picker defaults to Agreement Date; error check if empty. |
| Non‑compete over two years in CA | Clause void; may taint entire agreement | Auto‑removal when governing law = CA. |
| Equity sliders total ≠ 100 % | Cap table impossible to reconcile | Live algebra script re‑balances percentages unless overridden. |
| Ambiguous “Cause” definition | Wrongful‑termination suit | Dropdown injects NVCA‑standard Cause definition. |
6 Integration with Other Corporate Documents
- Stock Purchase Agreements (SPAs) – Section 3 cross‑references SPA by date.
- Equity Incentive Plan – Acceleration language aligns with Option Plan §3.3(e).
- Investor Rights Agreement – ROFR & Co‑Sale default to survive founder departures.
7 Lifecycle Checklist: Maintaining Founder Alignment Post‑Execution
- Quarterly Role Review – Does “CTO” still spend 70 % on code? Update responsibilities.
- Annual Vesting Audit – Confirm shares actually issued in board minutes.
- IP Register Update – Log new patents; execute Confirmatory Assignments if needed.
- Re‑Confirm Non‑Compete and Confidentiality when raising money in jurisdictions tightening labour law (e.g., FTC proposed ban, 2024).
8 Enforceability Across State Lines
| Clause | CA | NY | TX | DE |
|---|---|---|---|---|
| Non‑Compete | Generally void (§16600) | Reasonable scope ok | Statutory reasonableness test (Bus.&Comm.§15.50) | Blue‑pencil allowed |
| IP Assignment | Enforced | Enforced | Enforced | Enforced |
| Repurchase Option | FMV safe | FMV + appraisal rights | Enforced | Enforced |
| Weighted Voting | Enforced | Enforced | Enforced | Enforced |
Always align Governing Law with expected principal place of business or Delaware to harness predictable chancery precedent.
9 Environmental, Social & Governance (ESG) and Benefit Corporations
Selecting Benefit Corporation in the generator triggers:
- Public‑Benefit Purpose statement (§14601 CA Corps Code)
- Expanded Director Duty of Consideration beyond shareholder primacy.
- Impact Reporting Clause – annual third‑party standard.
For mission‑driven startups, this protects directors from derivative suits for pursuing planet over profit.
10 Tax Considerations at a Glance
- Section 1202 Qualified Small Business Stock (QSBS) – 5‑year clock starts on issuance; ensure C‑Corp path if eventual 100‑% gain exclusion desired.
- Self‑Employment Tax – LLC founders treated as self‑employed until elect S‑Corp; salary toggle interacts with reasonable compensation rules.
- Foreign Earned Income Exclusion (FEIE) – For founders abroad, salary vs dividends affect §911 eligibility.
11 Ethics, Conflicts, and Attorney–Client Privilege
If you use the generator while simultaneously seeking counsel from different law firms:
- Label internal drafts “Attorney‑Work Product Prepared at Direction of Counsel” to preserve privilege.
- A single lawyer cannot ethically represent multiple founders with materially adverse interests without informed written consent (California Rule 1.7).
12 Limitations of a Self‑Service Generator
While the logic covers common scenarios, automated drafting cannot:
- Detect securities crowd‑funding thresholds under Reg CF.
- Flag export‑controlled algorithms requiring a BIS licence.
- Negotiate founder divorce settlements.
Consult bespoke counsel for edge cases.
13 FAQ
Q1 Is a Founders Agreement enforceable if we never incorporate?
Yes. Courts treat it as a partnership contract; duties arise under UPA. But you lose limited‑liability protection.
Q2 We’re bootstrapping. Can we postpone vesting start until first revenue?
Yes—use the “Custom Schedule” field and define commencement upon first dollar of GAAP revenue. Remember to file 83(b) within 30 days of the issuance date, which may precede cash‑flow.
Q3 Will YC or Techstars require changes?
They accept standard 4‑year/1‑year; may insist on double‑trigger acceleration for key founders. Keep your cap table clean—no “advisor” shares over 1 %.
Q4 How do we value shares for repurchase?
Insert reference to latest 409A or an independent third‑party appraisal firm; avoid internal board‑set FMV to reduce conflicts.
Q5 Can I reuse this template if we pivot to a DAO?
Yes, but token issuance triggers securities analysis—consult counsel on a SAFT or Reg D exemption.
Q6 Does the generator store my confidential data?
No. Data lives in your browser session; exporting to PDF/DOCX happens client‑side.
14 Action Steps
- Complete the form thoroughly—hover tooltips explain each term.
- Copy the draft into your working doc or Download DOCX.
- Circulate for red‑line comments among founders.
- Schedule a 30‑minute consult if custom clauses or cross‑border issues surface.