Why a “Founder Prenup” is Vital to Your Startup

One of the crucial steps to starting a business that many entrepreneurs miss, is a “founder prenup”. Company founders should always sign a contract that governs their business relationships.

The primary reason to enter into a prenup in the context of marriage is to manage expectations and ensure that imbalances in contribution to the marriage are understood and acknowledged in advance. The same applies to founders’ agreements: we want to ensure that the respective contributions of the founders are set out upfront, the business is protected if something goes wrong and there is a predetermined outcome if the founders part ways.

Five reasons why a founders’ prenup is so important

1. Intellectual Property

Any Intellectual Property created by a founder who is not an employee (paid under PAYE) of the company belongs to that founder from the point of creation. To transfer the IP to the company, a written agreement must be signed. Unless the company owns the IP, it may be unable to use it if the founder who created the IP leaves.

2. Shares

Founders usually receive shares as “sweat equity” – compensation for the work they will do for the company. If a founder leaves in the early stages of growth, the remaining shareholders will want to take back some or all of that leaving founder’s shares. Unless there is a written vesting agreement in place (using quite precise language), the shareholders may be unable to take back these shares – meaning that a person no longer involved in the business retains significant shareholding and will benefit from the hard work of the remaining shareholders.

3. Non-competes

It’s important that a founder is unable to set up a competing business or use the skills and know-how they gained working for a company to benefit another company. You always want to make sure there are written restrictive covenants in place with each co-founder to ensure that they can’t damage the company by setting up or working for a competing business.