The founders' agreement – five clauses every agreement needs.

Corporate · August 12, 2026 · 6 min read

The short answer

Five subjects must be settled in writing before the company is worth anything: equity split with a vesting mechanism, decision-making and deadlock resolution, assignment of IP to the company, what happens when a founder leaves, and restrictions on share transfers. Everything else matters too; these five are critical.

1. Equity split – with reverse vesting

The split itself (50/50? 60/40?) matters less than the mechanism attached to it. Without reverse vesting, a founder who leaves after six months walks away with their full stake – and the remaining founders spend years working for them. The standard structure: shares subject to a company repurchase right that lapses gradually, typically over 3–4 years with a one-year cliff.

An Israeli point: Income Tax Circular 5/2017 sets cumulative conditions under which applying the mechanism does not change the income's classification – a later sale of the shares remains taxed as capital gain, with the original acquisition date and price preserved. The conditions include fixing the mechanism in writing at incorporation (or within six months) or in connection with a material investment, repurchase only by the company or the other shareholders, and ordinary shares identical in rights to others of their class. Structure it with advice – don't copy a US template.

2. Decision-making – and what happens on a tie

• Which decisions require unanimity (dilution, sale, founder compensation, new lines of business), and which are decided by simple majority.
• In a 50/50 company – a deadlock mechanism: an agreed mediator, a neutral director, or a buy-sell provision. A tie with no mechanism is a recipe for total paralysis.
• Who represents the company externally, and who may bind it – up to what amount.

3. Intellectual property – everything goes to the company, including what predates it

This is the clause whose failure is deadliest in due diligence. Three components:

• Full assignment of all venture-related IP – including what was developed before incorporation, at night, on a personal laptop.
• Disclosure of history: if a founder developed the idea while employed elsewhere, that is a problem to surface now – not when an investor asks.
• Waiver of moral rights to the extent permitted, and a future-cooperation clause for registrations.

4. Founder departure – the scenario the agreement exists for

• Good leaver / bad leaver: the difference between a founder forced to leave (illness, personal circumstances) and one who walks to a competitor – and what each receives for unvested, and sometimes vested, shares.
• Pricing mechanism: who values the repurchased shares, and how (appraisal, formula, last-round price at a discount).
• Non-compete and non-solicit – within the limits of what Israeli law will enforce, which narrows sweeping non-competes considerably. A well-drafted, targeted clause is worth more than a draconian one a court will strike.

5. Transfer restrictions – controlling who sits at the table

• Right of first refusal (ROFR) for the company and the other founders before any third-party sale.
• Tag-along – if a founder sells, the others may join on the same terms.
• Bring-along (drag) – preventing a small minority from blocking an exit the majority approved, at thresholds set in advance.

Frequently asked questions

We have articles of association – why a founders' agreement too?

The articles are a public, general document; the founders' agreement is a private contract governing what nobody wants in a public filing – departures, deadlocks, compensation. The structural parts (transfer restrictions, rights) should be mirrored in the articles so they bind everyone. The two documents must speak to each other.

When to sign?

Before there is anything to divide. The agreement is easiest to draft when the company is worth zero – every delay raises the emotional and financial price. The first financing round will require it anyway.

Can we start from a template?

A good template is a starting point for the founders' conversation – not a substitute for tailoring. The critical clauses (vesting, departure, IP) depend on circumstances: who is quitting a job, who brings pre-existing IP, who is putting in money. The tailoring is precisely the work.

See also: Articles of association in Israel – the Law’s defaults versus tailored articles; Section 102: capital track vs. income track – a practical comparison.

Service pageCompany formation in Israel – legal support from incorporation to the first round→

The above is general information only, current as of the date of publication, and does not constitute legal advice or a substitute for advice on your specific circumstances. Consult a lawyer before acting.

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