The founder agreement was the fourth or fifth document we produced and the first one anybody was reluctant to open. It is a strange thing to write. You sit in a room with people you chose, whose judgment you trust enough to bet several years of your life on, and you write down what happens when one of you leaves and the rest of you resent it.

Nobody enjoys the conversation. Everybody who has skipped it has regretted it.

The agreement is not a legal formality wrapped around a friendship. It is the first thing the company builds, and like anything you build, it is either designed for the conditions it will actually meet or it is decorative.

Vesting is a promise to your future self

The standard shape is four years with a one year cliff, then monthly. Nothing vests for the first twelve months. At month twelve a quarter of the grant vests at once. After that it drips.

Founders resist applying this to themselves. The reasoning is always some version of: we are the ones building it, why would we restrict our own stock. The answer is that vesting is not protection against you. It is protection against the version of this company that exists after somebody leaves.

Run the scenario. Five people split the company evenly. In month seven one of them takes a job somewhere else, for reasons that are entirely understandable and possibly medical. Without vesting they walk away owning a fifth of the company, permanently, with no further obligation to anyone. The four people who remain now work for four more years knowing that twenty percent of everything they build accrues to somebody who left before the product existed. That is not a legal problem. It is a motivation problem, and it will not resolve.

With vesting, the same person leaves in month seven having crossed no cliff and keeps nothing. That sounds harsh in the abstract and it is exactly right in practice, because the alternative punishes the four people who stayed.

Two refinements worth understanding. Acceleration on a change of control determines what happens to unvested stock if the company is acquired. Single trigger accelerates on the acquisition itself, which acquirers dislike because it means the people they are buying can leave immediately. Double trigger accelerates only if the acquisition happens and the person is terminated, which is the market standard and the one you should default to. The other refinement is credit for time already served. If you have been working on this for a year before incorporating, it is normal to vest a portion at signing rather than pretend the year did not happen.

The election with a thirty day window

If your stock is subject to vesting, there is a tax election you must file within thirty days of the grant. Thirty calendar days. There are no extensions and there is no relief for not having known about it.

The mechanics matter, so here they are plainly. Restricted stock is normally taxed as it vests, at the value on each vesting date. In a company that is going well, that value rises. So you would recognize ordinary income every month, on stock you cannot sell, in a company with no liquid market, and you would owe real tax in cash on paper gains. Founders have been genuinely ruined by this.

The election lets you choose to be taxed at grant instead, when the stock is worth close to nothing. You pay tax on approximately zero, and everything afterward is capital gain rather than ordinary income. It also starts the clock for the qualified small business stock holding period discussed in Lesson 1, which is a second reason it belongs on day one rather than day thirty-one.

The cost of filing it when you did not need to is a stamp. The cost of not filing it when you did need to is uncapped. Treat it as unconditional.

The intellectual property, including the part from before the company existed

Here is the uncomfortable default: work belongs to the person who did it unless there is a written assignment. Not to the company they were thinking about forming. Not to the group chat where the idea was discussed. To the individual.

That means the prototype somebody built in the two months before incorporation, the model evaluation harness, the brand name, the domain, the pitch deck and the schema all sit outside the company until they are formally assigned into it. Investors check this. Acquirers check this harder. A single unassigned component discovered during diligence can hold up a transaction for weeks while lawyers chase a person who has since stopped answering email.

Two related traps. The first is employment agreements at day jobs, many of which claim inventions made during the employment period, sometimes regardless of whether company equipment was used. If any founder built anything material while still employed elsewhere, that needs a real answer, ideally a written release, before it becomes somebody else’s leverage. The second is the helpful friend. Somebody who contributed a weekend of work, was thanked warmly, was never paid and never signed anything, now holds a copyright interest in part of your product. Get a short assignment signed at the time. It is a one page document and it costs a favor.

The parts everyone skips

The equity terms get attention because they are about money. The following clauses get skipped because they are about behavior, and they are the ones that actually determine whether the company survives its second year.

• Roles and decision rights. Not job titles. A written statement of what each person can decide alone, what needs agreement, and what needs everyone. Without it, every disagreement escalates to a vote, and a company that votes on things moves at the speed of its slowest conversation.
• What full time means, and when it starts. Founders frequently have different runway, different obligations and different tolerance for risk. Some are in on day one, others in four months. Write down which, and tie the equity to it, because the unspoken version of this is the most common source of resentment I have seen.
• Departure mechanics. What happens to unvested stock, to vested stock, to the title, to the email address, to the customer relationships that person owned. Decide it now, when nobody is angry.
• Deadlock. An even number of founders needs a tiebreak rule. An odd number needs one too, once somebody leaves.

Three ways this goes wrong

You split evenly because it is the polite thing to do. An even split among a large founding team is often the right answer, and it is just as often the answer nobody wanted to argue about. If contributions and commitments differ materially, an even split encodes a disagreement rather than resolving it. Have the conversation while it is still cheap.

You agree it verbally and mean it sincerely. Verbal agreements between friends are perfectly genuine and completely unenforceable. They also drift, because two people remember the same conversation differently after eighteen difficult months. The document is not there because you distrust each other. It is there so that the version of you in month twenty does not have to reconstruct the version of you in month one from memory.

You defer it until the first raise. By then it is not a negotiation among peers, it is a condition imposed by a term sheet in a week when you have no leverage and no time. Every founder who has done it this way describes the same feeling.

Equity is easy to give and impossible to take back.

Tomorrow: the cap table, and what your early generosity looks like to the person writing the next check.