Most startups begin with two or three people, a good idea and a lot of goodwill. At that stage, putting the relationship in writing can feel unnecessary, even a little awkward. Everyone is working hard, nobody is being paid much, and the company is worth very little.
That is exactly why it is the right time. The questions that cause founder disputes later, such as who owns what, who decides, what happens if someone leaves and who owns the code, are easy to answer when the stakes are low. Once there is revenue, an investor term sheet or a falling-out, every one of those questions becomes a negotiation.
This article explains what a founders’ agreement should cover, how it fits with your company’s constitutional documents, and the practical steps to take before you raise money or bring on new shareholders.
What is a founders’ agreement?
A founders’ agreement is a contract between the people starting a business, setting out how they will own, run and, if necessary, leave it. Some founders sign one before the company is registered. More often, the terms are built into a shareholders’ agreement once the company exists.
Under the Companies Act 71 of 2008, every company has a memorandum of incorporation (MOI), which is its constitution and binds the company and its shareholders. A shareholders’ agreement sits alongside it. Section 15(7) of the Act provides that a shareholders’ agreement must be consistent with the Act and the MOI, and any inconsistent provision is void to the extent of the inconsistency. In practice, this means the two documents must be drafted together. A carefully negotiated pre-emptive right in a shareholders’ agreement can be undermined by a standard-form MOI that says something different.
It is also worth knowing that since 27 December 2024, when parts of the Companies Amendment Act 16 of 2024 came into force, most MOI amendments take effect 10 business days after the Companies and Intellectual Property Commission (CIPC) receives the notice of amendment, unless the CIPC acts sooner or the notice states a later date. Plan for that lead time if your MOI needs to change before a funding round closes.
The issues co-founders should agree early
1. Equity split and how shares are issued
Agree the percentage each founder will hold and the reasoning behind it, such as capital contributed, time committed, intellectual property brought in or the role each person will play. Then make sure the shares are actually issued properly: a board resolution, consideration for the shares, entries in the securities register and, where applicable, share certificates. Companies must also keep beneficial ownership information up to date and file it with the CIPC. Investors will check all of this in due diligence, and gaps can delay or derail a round.
2. Roles, time commitment and decision-making
Record each founder’s role, whether they are working full-time, and whether they may take on other work. Decide which decisions need unanimous or special approval, for example issuing new shares, taking on debt, hiring senior staff, or selling the business. Clear decision rules prevent one founder from being outvoted on matters that go to the heart of the business.
3. Vesting and leaver provisions
If a founder leaves after six months but keeps a third of the company, the remaining founders carry the business while a passive shareholder benefits. Vesting addresses this: founders earn their shares over time, and a departing founder must sell back unvested shares. Leaver provisions then set the price, usually distinguishing between a “good leaver” (for example, because of death or ill health) and a “bad leaver” (for example, after a material breach or dismissal for misconduct). We will cover vesting in more detail in a separate article.
4. Intellectual property
This is one of the most common gaps we see. Under the Copyright Act 98 of 1978, the author of a work, such as software code, generally owns the copyright unless it was created in the course of employment under a contract of service. Founders are often not employees in the early months, so the code, designs and brand they create may belong to them personally, not the company. An assignment of copyright must be in writing and signed by the person assigning it. Every founder should assign existing and future IP relating to the business to the company, and confirm that it does not belong to a former employer.
5. Funding and contributions
Agree whether founders will contribute cash, on what terms, and whether contributions are loans or share capital. If a founder lends money to the company, record the loan terms, including interest and when it is repayable. Also agree what happens if more funding is needed and one founder cannot contribute.
6. Transfers, investors and exits
Standard protections include pre-emptive rights (existing shareholders get the first opportunity to buy shares being sold), tag-along rights (minority shareholders can join a sale on the same terms) and drag-along rights (a majority can require minorities to join an approved sale of the whole company). These make the company easier to sell and protect minorities from being left behind.
7. Deadlock and disputes
Two equal founders who disagree can paralyse a company. A deadlock mechanism, such as escalation to mediation, an independent expert or a buy-out procedure, gives a way forward. A dispute resolution clause should say whether disputes go to mediation, arbitration or court.
8. Death, incapacity and divorce
Shares form part of a founder’s estate and can be affected by their marriage regime. The agreement should give the remaining founders or the company a right to buy the shares on these events, ideally backed by funding such as a buy-and-sell arrangement.
9. Confidentiality and restraints
Founders have access to everything. Confidentiality obligations and a reasonable restraint of trade help protect the business if a founder leaves to start a competitor. Restraints must be reasonable in scope, area and duration to be enforced.
Checklist: before you sign or raise
- Register the company and adopt an MOI that matches what the founders have agreed.
- Issue the founders’ shares properly and update the securities register and beneficial ownership filing.
- Have each founder sign a written IP assignment in favour of the company.
- Agree roles, time commitment and reserved decisions in writing.
- Include vesting, good leaver and bad leaver provisions.
- Include pre-emptive, tag-along and drag-along rights, and a deadlock mechanism.
- Deal with death, incapacity and divorce, and consider how a buy-out would be funded.
- Record any founder loans or other contributions.
- Review the agreement before each funding round, since investors will usually require changes.
How O’Reilly Law can help
We advise founders from incorporation through to their first and later funding rounds. We draft founders’ and shareholders’ agreements and MOIs that work together, prepare IP assignments, set up vesting and leaver provisions, and help clean up share issues and records before investor due diligence. We also act for founders when relationships break down and a negotiated exit is needed.
Contact us to put your founders’ agreement in place.
Related reading: What should be covered in my shareholders’ agreement? · If your business partner died tomorrow, who would own your business?
This article is general information and not legal advice. Correct as at October 2026.