Two friends in Brampton decide to build a delivery-scheduling app. One writes code at night after a shift. The other has the contacts at local trucking companies. They agree to split everything 50/50, shake hands, and start. Eighteen months later the coder has given up weekends for a year and a half, the salesperson took a full-time job elsewhere after month four, and an investor is asking a simple question: who owns this company and its software? This scenario is invented, but the questions it raises are the ones a founders’ agreement exists to answer.
A founders’ agreement is a written understanding between the people starting a business about who contributes what, who owns what, and what happens when circumstances change. It is usually signed very early, sometimes before a corporation exists. It tends to feel unnecessary at that stage, because everyone is getting along and there is little to divide. That is exactly why it is the easiest time to write one. Negotiating the split of nothing is far gentler than negotiating the split of something.
This post is general information about Ontario law and does not replace advice on your own situation. Startup arrangements also carry tax and securities consequences, so your accountant and lawyer should both see the plan before you sign.
You May Already Be Partners
Founders often assume that nothing legally exists until they incorporate. That can be wrong. Under Ontario’s Partnerships Act, a partnership is the relationship between people carrying on a business in common with a view to profit. No registration or written agreement is required. If two people are already selling, invoicing or signing up customers together, a court could find that they are partners, with each one potentially answerable for debts the partnership incurs.
Someone who signs a contract on behalf of a corporation that has not yet been formed can face a similar problem. Ontario’s Business Corporations Act (OBCA) deals with these pre-incorporation contracts: the person who signs can be personally bound unless the corporation later adopts the contract or the contract expressly says otherwise. So if your co-founder is about to sign a three-year software subscription or a lease for a small unit near Steeles Avenue in the name of a company that does not exist yet, pause and deal with that first.
A founders’ agreement can spell out the plan to incorporate, who is authorized to commit the group in the meantime, and how costs paid personally will be treated. Better still, incorporate before signing anything significant. Our page on business formation and organization describes that work.
Decide the Split on What Each Person Will Actually Do
An equal split is common because it avoids a hard conversation, and sometimes it is the fair result. It should be a conclusion you reach, though, rather than a default. Consider what each founder is bringing, separately from what each one hopes to receive:
- Cash invested at the start, and any cash promised later
- Existing work, such as code, designs, a prototype or a customer list
- Time commitment: full-time from day one, or evenings until funding arrives
- Skills that would be expensive to hire
- Personal guarantees or other risks taken on for the business
Write down the expected time commitment in plain numbers. “Full-time by the time we close our first paid customer” or “at least 20 hours a week until March” can be measured. “Will contribute as needed” cannot. Many founder disputes are really disputes about effort, and vague wording leaves each person sincerely convinced that they are the one carrying the business.
Think too about the even split’s practical weakness. With two 50 per cent shareholders, neither can outvote the other. That may suit a pair who want every decision to be joint, but the agreement should then say what happens when they truly cannot agree. Otherwise the company can freeze at the moment it most needs to move.
Vesting: Why Founders Earn Their Shares Over Time
Vesting means a founder’s ownership becomes secure gradually, usually as long as they stay involved. A commonly used pattern runs over several years with an initial waiting period, often called a cliff. Nothing in Ontario law prescribes that pattern; it is a business choice.
Consider a hypothetical. Three founders each hold one-third. One leaves after five months to take a job in Toronto. Without vesting, that person keeps a third of the company forever, even though the other two will spend years building its value. Investors notice that sort of “dead equity,” and the remaining founders tend to resent it. With vesting, the company or the remaining founders could buy back most or all of those shares at a price set in advance.
There is an Ontario-specific wrinkle worth knowing. Under the OBCA, a share cannot be issued until it has been fully paid for, in money or in property or past service that is worth at least the fair equivalent of that money. A promise of future work does not count. That is why founder vesting is usually built in reverse: the founder receives and pays for all the shares at the outset, and the corporation or other founders hold a right to repurchase unvested shares if the founder leaves early.
The repurchase mechanism needs care. A corporation buying back its own shares has to meet solvency tests under the OBCA, so a right that only the company can exercise could fail when cash is short. Agreements often allow the other founders to buy instead. Tax is another reason to get professional input before setting the price, because an arrangement that looks simple on paper can produce unexpected income or capital gains results.
Who Owns the Code, the Name and the Ideas
For technology and brand-driven startups, this is the section that matters most, and the one most likely to be missing.
Under the Copyright Act, the author of a work is generally its first owner. There is an exception for work created in the course of employment under a contract of service, where the employer is generally the first owner unless they agree otherwise. Most founders are not employees when the first version gets written. Their freelance designer certainly is not. So the default position may be that the individual who wrote the code owns the copyright, not the startup.
Transferring that ownership takes a signed document. The Copyright Act says an assignment of copyright is not valid unless it is in writing and signed by the owner or the owner’s authorized agent. Moral rights, which protect an author’s connection to and the integrity of a work, cannot be assigned at all. They can only be waived, and an assignment of copyright does not by itself waive them. A proper founder IP agreement therefore includes both an assignment and a waiver.
The agreement should cover:
- Everything created before incorporation that relates to the business
- Everything created afterward, within the founder’s role
- Domain names, social media accounts and app store developer accounts, which are often registered to one person’s personal email
- Trademarks and any application filed in a founder’s own name
- A statement listing anything a founder is deliberately keeping, such as a pre-existing library licensed to the company rather than transferred
Check also for conflict with a founder’s day job. An employment agreement with a current employer may claim ownership of inventions or restrict outside work. If your co-founder works in software at a Mississauga company and writes your product on the side, read that contract before you rely on the code. Our intellectual property page outlines related help.
Roles, Decisions and Money
Titles are less important than authority. The agreement should say who runs product, who runs sales, who deals with the bank, and which decisions need everyone’s signature. Typical joint decisions include taking on debt above a set amount, issuing shares, hiring or firing, signing long contracts, and changing the direction of the business.
Pay deserves its own paragraph. Founders frequently work without a salary at first, then disagree later about whether unpaid months were a gift, a loan or a reason to hold more shares. State the answer. Say whether money a founder has spent or advanced is a shareholder loan that must be repaid, whether interest applies, and whether repayment waits for a funding event.
Be careful about treating unpaid work casually when other people join. Employment standards protections, including minimum wage, apply to employees regardless of how exciting the equity offer is. Someone who is truly an employee cannot simply agree to give those protections up. Directors of an Ontario corporation can also face personal liability for certain unpaid wages, which is a reason to keep those obligations visible as the team grows.
When a Founder Leaves, Is Pushed Out, or Falls Ill
Founders hate this topic, so handle it by imagining someone else’s company. Sort departures into categories and set out the consequences of each:
Voluntary departure. The founder resigns to pursue something else. Unvested shares are generally repurchased at a low price. Vested shares may stay with the founder or may be subject to a purchase right at a set formula.
Removal for serious misconduct. The agreement should define the misconduct, because “cause” is an invitation to litigate if left open. Theft, a serious breach of the agreement and competing with the company are common examples.
Removal without misconduct. If the other founders simply want someone gone, vesting often speeds up or the repurchase price rises, to discourage opportunistic removal shortly before a vesting date.
Death or long-term disability. Shares may pass to an estate that has no interest in running a startup. A purchase right, sometimes funded with insurance, can solve that for both sides.
Consider also what a departing founder keeps doing afterward. Ontario’s Employment Standards Act, 2000 generally prohibits non-compete agreements between employers and employees, with exceptions for certain executives and for the sale of a business. Non-solicitation and confidentiality terms remain available and more commonly fit, subject to being reasonable. Do not assume a broad non-compete clause in a founder’s employment contract will hold up simply because the person is also a shareholder. Get that drafted with the statute in view.
Investors, Securities and Share Registers
Even a small startup issuing shares is dealing with securities law. Private companies usually rely on an exemption from the prospectus requirement, and common exemptions depend on who is buying and how the company’s constating documents restrict transfers. Handing shares to friends, family and early supporters without checking may create trouble that surfaces only during due diligence.
The founders’ agreement can also commit everyone to what a future investor will ask for: clean records, IP assignments, and a willingness to sign a fuller shareholder agreement. It can include a “drag-along” concept or a promise that founders will cooperate with a financing approved by a stated majority. It should also fit with the corporation’s registers, including the register of individuals with significant control that most private Ontario corporations must maintain.
From Founders’ Agreement to Shareholder Agreement
A founders’ agreement is a starting document. Once a corporation exists and shares are issued, founders usually replace or supplement it with a shareholder agreement, which may be a unanimous shareholder agreement that moves some director powers to shareholders under the OBCA. Share transfer restrictions, rights of first refusal, buy-sell mechanics and deadlock terms normally get fuller treatment there.
Beware of two documents that contradict each other. When the later agreement is signed, it should say plainly whether it replaces the earlier one. Also avoid a founders’ agreement full of phrases like “we will agree later on the details.” A court may decline to enforce terms too uncertain to give effect to, and a term that merely promises future agreement gives you little to rely on during a dispute.
How to Have the Conversation
Set aside a few hours away from product work. Each founder can privately write answers to a short list before you compare notes: How many hours can you honestly commit for the next year? What would make you leave? How much personal money could you lose without damage to your family? What would you do if a co-founder stopped pulling their weight? Differences that surface in this exercise are useful information, and a few may even change whether you should go into business together.
The City of Brampton’s economic development office and local entrepreneurship programs can help founders think through business planning and funding, though they do not replace individual legal advice. When your answers are on paper, a lawyer can turn them into an enforceable document and flag what is missing. If you and a co-founder want to work through this properly, you can contact our office to discuss the next step. Each founder should also consider getting independent advice, because their interests differ even when their friendship is strong.