Company Setup & Legal on Stack & Scale Journal

A Co-Founder Agreement Template, Clause by Clause

Fri, 06 Nov 2026 17:07:00 +0000

A co-founder agreement does two jobs. Before incorporation, it records what the founders agreed: who owns what, who does what, and what happens if someone leaves. After incorporation, most of its clauses get replaced by formal company documents. Founders who understand that second job write a better first draft, because they know where each promise has to end up.

This is general information, not legal or tax advice. The template below is a starting point for a conversation with counsel, not a substitute for the stock purchase agreements, IP assignments and board consents a corporation needs.

Where each clause ends up

Clause in the founder agreement	Becomes, after incorporation
Equity split	Number of shares in each founder’s stock purchase agreement
Vesting	Repurchase right in the restricted stock purchase agreement
IP	Each founder’s IP assignment agreement
Roles and titles	Officer appointments in the board consent
Board seats	Board composition in the bylaws and initial consent
Decision-making	Board and stockholder approval rules under the charter, bylaws and Delaware law
Departure	Repurchase right, plus any separation agreement
Confidentiality	IP and confidentiality agreement

The how to start a startup company guide lists those formation documents in order. The point of the table: nothing in the founder agreement should contradict what the company documents will say. If the founder agreement promises acceleration on a sale and the stock purchase agreement does not include it, the stock purchase agreement is what binds the company.

The template

The template below is written for a two-founder company that intends to form, or has formed, a Delaware C corporation. Bracketed text gets filled in.

CO-FOUNDER AGREEMENT

1. Parties
 This agreement is between [Founder A] and [Founder B] (the "Founders"),
 dated [date].

2. The company
 The Founders intend to form [Company name], a Delaware corporation
 (the "Company"), to build [one-sentence description]. Until the Company
 is formed, this agreement records the Founders' understanding.

3. Equity
 On formation, the Company will issue common stock as follows:
 [Founder A]: [number] shares ([__]%)
 [Founder B]: [number] shares ([__]%)
 Each Founder will pay fair market value for the shares at issuance.

4. Vesting
 Each Founder's shares will vest over [48] months, with [25]% vesting
 after [12] months of continuous service and the rest in equal monthly
 installments. Unvested shares will be subject to repurchase by the
 Company at the lower of cost or fair market value if the Founder's
 service ends. [Vesting credit of [__] months for work before formation.]
 Each Founder will file an 83(b) election within 30 days of issuance.

5. Acceleration
 [None.] / [If the Company is acquired and the Founder is terminated
 without cause within [12] months afterward, [__]% of unvested shares
 will vest.]

6. Intellectual property
 Each Founder assigns to the Company all rights in work product related
 to the Company's business, including work created before formation,
 and will sign the Company's IP assignment agreement at issuance. Each
 Founder confirms that no current or former employer has a claim to
 that work, except as listed here: [list or "none"].

7. Roles
 [Founder A]: Chief Executive Officer, responsible for [areas].
 [Founder B]: Chief Technology Officer, responsible for [areas].
 Roles may change by board decision.

8. Time commitment
 Each Founder will work full time on the Company starting [date].
 [Exceptions: ...]

9. Board and decisions
 The initial board will be [Founder A and Founder B]. Decisions
 outside the ordinary course (raising money, issuing equity, hiring
 executives, taking on debt over $[__], selling the Company) require
 approval of [both Founders / the board].

10. Compensation
 Neither Founder will draw salary until [event or date]. Salary
 changes require board approval.

11. Departure
 If a Founder leaves, the Company may repurchase unvested shares under
 Section 4. Vested shares stay with the departing Founder. The
 departing Founder will return Company property and keep Company
 information confidential.

12. Confidentiality
 Each Founder will keep the Company's non-public information
 confidential during and after their service.

13. Disputes
 The Founders will try to resolve disagreements by discussion for
 [30] days, then by [mediation / arbitration] in [location].

14. Replacement by formal documents
 Once the Company issues stock, the Company's charter, bylaws, stock
 purchase agreements and IP agreements control. The Founders will
 sign documents consistent with this agreement.

Signed: ____________ [Founder A] ____________ [Founder B]

Notes on the clauses that cause fights

Equity (clause 3)

The number of shares matters less than the percentages, but use real numbers so the agreement maps directly onto the stock purchase agreements. Y Combinator partner Michael Seibel’s essay on splitting equity argues for equal splits. Whatever the split, write down the reasoning in one line. Investors ask.

Vesting (clause 4)

The four-year, one-year-cliff schedule in the template mirrors what YC’s essay calls a typical setup in the Valley. Vesting protects the founder who stays. Without it, a founder who leaves in month three keeps their full stake, and the remaining founder works for years to build value for someone who left.

“Vesting credit” gives a founder credit for months already worked before formation. It is negotiable and should be written as a specific number of months.

The 83(b) line is in the template because missing it is expensive. IRS instructions for Form 15620 require the election no later than 30 days after the date the property was transferred.

Acceleration (clause 5)

Single-trigger acceleration vests shares on a sale alone. Double-trigger acceleration requires a sale and a termination. Acquirers price in any acceleration, so founders should agree on it now with the trade-off in mind. Leaving it blank is a choice too.

IP (clause 6)

This is the clause investors read hardest. The confirmation about former employers matters most for a technical founder who wrote early code while employed elsewhere. If there is any doubt, list it and get a lawyer’s view before the company is formed. The guide on how to find a technical cofounder covers trial projects and why IP assignment comes before the first commit.

Decisions (clause 9)

Two founders on a two-person board can deadlock. The template’s approval list keeps the founders from surprising each other on the big decisions. It does not solve deadlock. Some teams give the CEO the tie-break on operating questions and keep equity and sale decisions joint. YC’s essay also suggests that only the CEO hold a board seat before a significant equity raise. Pick one approach and write it down.

Departure (clause 11)

The template uses the lower of cost or fair market value for unvested shares, which means a departing founder gets back roughly what they paid for unvested stock. Some agreements add “good leaver” and “bad leaver” terms. These add negotiation and can be hard to apply when the facts are disputed.

What the template leaves out

Non-competes. Enforceability varies by state and changes over time. Ask counsel in the state where the founders work.
Entity choice. The template assumes a Delaware C corporation. The reasons are covered in Delaware C corp vs LLC.
Investor terms. Nothing here binds a future investor. A seed or Series A investor may ask founders to re-vest part of their stock. A clean founder agreement makes that conversation shorter.

If the company already exists

Founders who incorporated first and talked later need a different fix. There is no need for a pre-formation agreement, because the corporation’s documents already govern. The work is an audit:

Pull each founder’s stock purchase agreement and check that the share numbers match the cap table.
Confirm the vesting terms and repurchase price are what the founders believe they are.
Confirm each founder signed an IP assignment, and that it covers work done before the company was formed.
Confirm each founder’s 83(b) election was filed, and that the company has a copy.

Anything that does not match gets fixed by board consent and amended agreements. A short memo signed by both founders can still record the softer terms the documents do not cover: roles, time commitment, how deadlock gets broken.

Before signing

Each founder reads every clause aloud with the other present. Disagreements surface faster that way than over email.
Fill in every bracket. A blank is an argument postponed.
Have a lawyer convert the agreement into the formation documents within weeks, not months.
Calendar the 83(b) deadline the day stock is issued.

Delaware C Corp vs LLC for a Startup That Plans to Raise Venture Money

Fri, 06 Nov 2026 16:04:00 +0000

Short answer: for founders who plan to raise venture capital, the Delaware C corporation fits the way venture money is invested. Investors buy preferred stock, fund documents assume a corporation, and the federal small business stock exclusion only applies to C corporation stock. An LLC can suit a business that will stay owner-run and distribute profits. That is a different company from the one this site writes about.

This is general information, not legal or tax advice.

Clause by clause

Question	Delaware C corp	LLC
What investors buy	Preferred stock, or SAFEs that convert into it	Membership units, defined by the operating agreement
How profits are taxed	At the corporate level; stockholders taxed on dividends and sale gains	Passed through to members by default
Section 1202 (QSBS)	Available if the company qualifies	Not available while it is an LLC
Employee equity	Stock options, including incentive stock options	Profits interests or unit options under custom documents
Model financing documents	YC post-money SAFE, NVCA model documents	Custom drafting
Annual state cost in Delaware	Franchise tax plus a $50 annual report fee	Different regime; outside this site’s scope

Investors buy preferred stock

A seed or Series A investor expects a liquidation preference, protective provisions and conversion rights. Those live in a corporation’s certificate of incorporation. The NVCA model documents, last revised in October 2025 for the charter, stock purchase agreement and investors’ rights agreement, are written for a corporation issuing preferred stock. Y Combinator’s post-money SAFE converts into preferred stock in a priced round.

An LLC can create preferred units by contract. Every investor’s counsel then has to read a bespoke operating agreement instead of a familiar charter.

Pass-through income and fund investors

LLC income passes through to members, who receive a share of taxable income whether or not cash is distributed. Venture funds raise money from pension funds, endowments and foreign investors, and pass-through business income can create tax and filing problems for those limited partners. That is the reason fund investors tend to ask for a corporation before they invest.

QSBS: the C corporation requirement

Section 1202 lets a non-corporate holder exclude gain on qualified small business stock. The statute, as amended in July 2025 and reproduced by Cornell’s Legal Information Institute, defines a qualified small business as a domestic C corporation and sets these terms for stock acquired after July 4, 2025:

Exclusion of 50% after 3 years, 75% after 4 years and 100% after 5 years or more.
A per-issuer cap of $15,000,000 (or 10 times basis, if greater), indexed for inflation after 2026.
Aggregate gross assets of the corporation no more than $75,000,000 before and immediately after issuance.

Membership units in an LLC do not qualify. Under section 1202(i), stock received when an LLC later converts is treated as acquired on the date of the exchange, so the holding period starts then, not at formation.

Stock options for employees

Incentive stock options under Section 422 are options to buy stock of a corporation. A startup hiring engineers on equity can grant options under a board-approved plan and a 409A valuation. LLCs can offer profits interests, which work but need explaining to every candidate.

Delaware’s cost and its case law

The Delaware Division of Corporations’ annual report statistics say that nearly 70% of US-based IPOs in 2025 chose Delaware. For a seed-stage company, the cost is the annual franchise tax. The Division’s calculation page sets a $175 minimum under the Authorized Shares method and $400 under the Assumed Par Value Capital method, and the corporation pays the lesser. The walk-through in how to start a startup company shows why a startup with 10,000,000 authorized shares should file using the second method.

When the LLC question comes back

Founders sometimes start as an LLC to pass early losses through to their own returns, then convert before a priced round. Conversion is possible. It costs legal fees, starts the QSBS clock only at conversion, and puts a tax event and new documents in front of the company at the moment it is trying to close a round. If raising venture money is the plan, starting as a corporation avoids that work.

Also consider

A C corporation formed in the founders’ home state, then reincorporated in Delaware before a priced round (a merger or conversion, with its own legal costs).

A Delaware public benefit corporation, which is still a corporation that can issue preferred stock, with a stated public benefit in its charter.

For a profitable business with no plan to raise outside equity, a conversation with a tax adviser about which structure fits.