Creating a Business Partnership (Founders) Agreement

This article is about documenting founder/partner agreements, which may be called all sorts of different things – operating agreement, shareholders agreement, partnership agreement, company agreement, etc. (see below – Titles of Founders Agreements). This article applies if you form a corporation, LLC, limited partnership – whatever. It applies to technology startups, restaurant ventures or any other industry. When it comes to structuring business relationships, the issues that need to be discussed upfront and addressed in your partnership agreement are nearly all the same regardless of entity type and industry.

Some cofounders buy a partnership agreement template (e.g., operating agreement, shareholders agreement or other partnership agreement) from LegalZoom or Rocket Lawyer. Without an understanding of business law, they answer some questions, generate a document and sign an off-the-shelf template contract. Online Q&A template contract systems work well for very simple documents like non-disclosure agreements. For something as complex and custom as a partnership agreement, online forms and templates generally come up woefully short. I do my best to guide clients on when they can go the DIY route and when it’s especially risky. It’s risky with partnership agreements, no question about it. For more about when you need a business lawyer when forming a company and when you may not, read Do I Need a Business Attorney to Form a Company

Also, note that “partner” is a word that has special meaning in the law. Not every co-founder relationship is that of partners. Partners owe each other fiduciary duties, which is a very high standard of fair dealing. This is an important thing to consider when you structure your founders agreement, although in this article I use the words “founder” and “partner” interchangeably.

 Titles of Founders Agreements

It is unlikely you will sign anything titled, “Founders Agreement.” I use that term as a simple, overarching label for the governance and partnership-type documents and contracts you will sign that outline your roles and responsibility vis-à-vis your cofounders and the venture. The title of these documents will vary based on the entity type of your business (e.g., limited liability company, corporation, partnership) and exactly what you need to document (i.e., the terms of your business relationship). Below are some of the titles of documents you may run across that all fall under my umbrella terms, “founders agreement” and “partnership agreement.”

For an LLC:

  • Operating Agreement
  • Company Agreement
  • LLC Agreement or Limited Liability Company Agreement
  • Member Agreement
  • Partnership Agreement

For a Corporation:

  • Bylaws
  • Shareholders Agreement
  • Stockholders Agreement
  • Voting Agreement

For Partnerships:

  • Partnership Agreement (General Partnerships)
  • Limited Partnership Agreement (Limited Partnerships)
  • Limited Liability Partnership Agreement (Limited Liability Partnerships

What to Do If You Don’t Have Enough Budget to Pay a Lawyer

If you have very little budget, you can form an entity through LegalZoom or Clerky. Those DIY-type sites work well for forming the company because forming an entity by filing a Certificate of Formation or Articles of Incorporation with a Secretary of State is simple. However, they don’t work well for partnership agreements, which almost always require considerable custom drafting that doesn’t come through a DIY templated contract system.

I had an Austin-based technology company (a few college students launching a super interesting technology company in the entertainment industry) come to me recently and they had very little money to launch their business – a couple thousand dollars total (even less for legal matters). My advice to them was to write their agreement themselves – very simple, in a few pages set out the key terms of their business relationship. I told them to write down that after the company makes $10,000 in a month (it can be $2,000 or $20,000 or whatever number makes sense for you) they’ll come back to me (or another business lawyer, but hopefully me!) to draft a proper partnership agreement, which would be based on the initial terms, but would be a more formal and clear agreement.

The concern with something they write themselves is there will be lots of holes in it – lots of ambiguity or things not said. What we do as business lawyers includes closing holes in agreements. We make documents clear and cover all the issues we can reasonably contemplate upfront. This makes contracts drafted by lawyers longer and there’s usually a little more legalese, but what a great business lawyer does is artfully draft an agreement as clear and simple as possible, while still covering all the key issues.

With that group of college students, they may have a business dispute before they come back to me. In that case, there probably isn’t much to fight over yet and, while their DIY partnership agreement may not be airtight, it likely gets the job done for then. Provided they come back to me sooner than later, we can tighten things up. It’s possible (actually, it is very likely) that I would bring up some things to address that they didn’t talk up earlier in their first DIY agreement. That could create a little bit of negotiating work to get a new agreement signed among the three of them, but it’ll get done. At that point, the cofounders will almost certainly be getting along and agreeing on a new, enhanced partnership agreements shouldn’t be that tough. If they were to wait until things were not good (until they had a dispute), then getting something signed would be much more challenging.

This approach is much better than buying a template partnership agreement, which may not say at all what they want it to say. Yes, the college students in the startup could buy a LegalZoom partnership agreement and modify it, although that’s not simple. What I do as a business attorney is not, as they say, rocket science, but I’ve been at it for a long time. It took me years to get very good at drafting agreements and even today – 19 years after graduating from law school – there are little things I learn and tweak in my contracts. It’s an ongoing learning process and even a brilliant founder will have trouble modifying a legal contract effectively if they have no legal training. That’s risky business and I think they’d be better off with a “back of a napkin”-type agreement in the short-term. At least that will mirror their mutual intentions for their business partnership.

Hire the Right Lawyer

If you have a little budget to hire a lawyer, find the right one. When searching for a lawyer to hire, you want a “corporate” or “general business” lawyer. You don’t want a real estate or patent attorney, or a bankruptcy attorney, tax attorney, personal injury lawyer or another litigator to form your startup. You want someone who has done a lot of startup work. Experience in your specific industry is a plus, but rarely necessary.

The right lawyer should also have a good sense of risk vs. reward, and be willing to tell you when their services are critical, recommended, nice-to-have or not important. Someone who has some practical business experience apart from being a lawyer, who will take the time to explain things to you and who also returns your calls quickly, is the kind of lawyer that can make this process pleasant and help you understand how to approach it most effectively.

Fees are always a consideration. Lawyers charge widely different rates. The old adage, “you get what you pay for” typically holds true, although you generally will expect to pay less for solo practitioners and small firms compared to the big firms. Big firm lawyers (AmLaw 100) are usually great lawyers, although there are lots of great lawyers outside Big Law and their fees are generally much less.

Bring Your Deal to the Lawyer

While it probably isn’t a great idea to handle drafting a founders agreement on your own, outsourcing everything to lawyers is also a bad idea. Some of your founders agreement is legalese and you will want a lawyer to draft it. However, lawyers don’t know you and your partners like you know one another. That’s why it’s a good idea to discuss through every consideration with your partners and to write them down and deliver them to the attorney after spending as much time as needed to talk through the items.

Some key issues to discuss upfront include:

  • Ownership splits – for voting or for economics (distributions) as they can sometimes vary
  • Capitalization – who will contribute what assets or cash to the venture?
  • Decision making – will you require majority voting, supermajority (can be anything other than 51% or unanimous) or unanimous voting?
  • How to resolve disputes and deadlocks
  • Transfer of equity – can you each freely sell your equity to a third party?

We will look at these issues in greater detail in a moment when we dive into how they may be handled in a business partnership agreement. Also, consider talking about your goals and expectations for the business. This won’t necessarily be included in the partnership agreement, although it can clarify the vision you and your partners have going into the startup. Talk about what you’re doing and why. Does one partner want to work like crazy for five years to sell the company and retire while the other wants to launch a lifestyle business to kick off some easy money? These are very different goals, and you can avoid a lot of trouble when you know this information upfront.

Your business partnership agreement should clearly lay out how you want things to work between you and your cofounders. Sending the lawyer off to prepare a document, and then signing whatever the lawyer produces, is a mistake. It needs to be a collaborative process, which ideally starts with you and your partners delivering your thoughts and concerns to your lawyer.

Be certain to read all documents carefully and confirm with your cofounders that all aspects of your deal are clearly and accurately set out in the documents you sign. Generally speaking, if something you agree to with your partners is not included in the final, signed documents, you won’t be able to rely upon it later. Your cofounders may acknowledge and honor this type of external agreement, although you can’t count on that, especially if the partnership breaks down.

Items and Subjects in a Partnership Agreement


What percentage of equity ownership will each partner hold?

Will your ownership percentages be fully vested right away or will they vest according to the passage of time or other hurdles/metrics? Silicon Valley-style founder vesting in startup corporations is generally four years with a one-year cliff. For example, if a founder is granted 20% of the total equity of the startup, 5% vests at the start of the second year and the remaining 15% vests in 36 equal installments every month between the start of the second year and the end of the fourth year. Note: vesting works equally as well in LLCs and partnerships, not just corporations, although that’s where you can almost always expect to see vesting – in high-growth technology startups.

If you leave with unvested shares of stock, you won’t take them with you. They remain with the company (sometimes they are technically repurchased from you by the company). While this may seem like a bad deal for you if you are the one who leaves, consider it from the viewpoint of sticking around. How will you feel if one of your cofounders leaves after only one year and you stay for five years, but you both have the same equity ownership? Venture capitalists call that “dead weight” on your startup’s cap (capitalization) table and it harms the company because growing companies need to give their equity to people that are willing to work hard to grow the company.


How will you make decisions regarding extraordinary items (e.g., a sale of the company, selling equity/bringing in a new shareholder, etc.)? Options include majority voting, super-majority (may be 60%, 66 2/3%, 75% or any percentage in between 51% and 100%) or unanimous. It’s common in partnership agreements to have categories of decisions that are subject to different voting standards. For example, in a 51%/49% partnership, many decisions may be left to majority vote, which means the 51% partner gets to make the decision. Certain very important decisions, e.g., terminating the partnership or bringing on new partners, may require unanimous approval.

Capital Contributions

Who is contributing what to the company’s capital? You can contribute cash or other property. Some people just provide a lot of sweat equity. Be sure to talk this through carefully and determine that the contributions are fair all around.

Regarding cash contributions, will all cash be considered “paid-in capital” — meaning it stays in the company permanently — or will some portion of the cash be a loan to the company? I have seen plenty of founders disagree over this one issue. If you think your cofounder is putting $50,000 of equity into the business, but they expect to take it all back out as a repayment of a loan before you get to share in the profits, that’s something you need to talk through before they put in the money.

Compensation Other Than from Equity Ownership

Will the partners be compensated as employees? Your ownership percentage will entitle you to dividends/distributions out of profits. If you are working full-time in the venture and your cofounder is not, you may also feel you deserve a salary. That’s reasonable, although be sure to talk this through and come up with a fair salary. Talk about bonuses and future salary increases. It’s quite common for a partner working in the business to resent working for less than fair market value if the other partners have outside jobs. Meanwhile, passive partners (not active in the business) have an interest in ensuring the active partners don’t suck all the profits out of the venture in the form of salaries (raising their salaries as the company makes more money), leaving no net profits to be distributed among the owners in respect of their ownership percentages.

Roles & Responsibilities

  • What will you each do for the venture (i.e., daily roles and responsibilities)?
  • Will you each be active in the business or passive? If active, will you work full-time?
  • Will you have officer titles (e.g., CEO, co-CEO, President)?
  • Who will be listed on the company’s bank account(s) (i.e., which partners will have signature authority)?
  • Will two signatures be required for issuing checks over a certain amount?

Transfer of Shares

Will the partners be able to freely sell their shares (or other equity interests) to a third party? Some companies restrict the sale of equity under all circumstances. If you don’t restrict the sale of equity entirely, you may want to consider a mechanism used commonly in closely-held (small, private) corporations requiring that, before selling shares to a third party, a shareholder first offer the shares to the corporation and to the other shareholders. This is called a right of first refusal and it is a protection against waking up one day to find out you are in business with someone you didn’t choose as a partner. It’s common to include rights of first refusal in the context of LLCs and partnerships (not only corporations), as well.

Buy-Sell Mechanism

Even if you and your partners never have an argument, you may still decide at some point to part ways. One of you may marry and move to Singapore, or maybe you will get the job of a lifetime. Or you may come up with a new idea, or be recruited to join a hot startup at a time when the current venture is limping along. One thing you can count on is that things will change and how you and your partners think and feel today will shift over time. You absolutely must build into your founders agreement a mechanism for separating at some point in the future.

Buy-sell provisions address this issue. They give the owners the right to buy one another’s equity (stock or partnership or LLC interests) or sell their equity to the other owners. Buy-sell provisions also help keep things on track. A founder that knows their partner can buy their equity at any time is more likely to play nice and work through things rather than being difficult if a dispute arises.

There are lots of versions of how to accomplish a buyout, including Russian Roulette and the Texas Shootout. In a Russian Roulette buy-sell agreement, the party triggering the provision makes an offer to either buy the equity of the other partner(s) or sell their equity to the other partner(s), in either case at the same price. In other words, Party A may offer to pay $1,000,000 to buyout Party B or to accept $1,000,000 to be bought out (assuming they each own 50%, otherwise the numbers would be proportionately adjusted). The party making the offer has an incentive to get the price right and not pay too much or sell on the cheap.

In a Texas Shootout, each partner submits a sealed bid, which contains the price at which they’d be willing to buy the other’s shares or other equity interests. The partner who submits the highest offer gets to purchase the other’s equity.

Provisions like Russian Roulette and the Texas Shootout work best when all partners have the resources to follow through on the purchase. If one party has a lot more money than the others, that party may be able to leverage their ability to complete a purchase into a better deal because the partners without resources can’t make a great offer if they lack the ability to pay for, or finance, the purchase.

Usually buyouts of this type happen one to two months after the “winner” is determined. This type of buyout is documented in some type of partnership buyout agreement, which may be called a stock purchase agreement, membership (or partnership) interest purchase agreement or go by some other title.


Most partners want to be in business with their partners and only their partners. They don’t want to wake up tomorrow and find themselves in business with their partner’s wife or son or creditor. For this reason, it’s wise to restrict the ability of owners to transfer their shares or other equity interests to third parties. In partnership agreements, we often give the other owners the right to buy the interests on an owner who passes away or declares bankruptcy. If an owner gets a divorce, the other owners or the company can buy the marital interest of the ex-spouse. There are lots ways to handle these issues, and hiring the right lawyers means they will walk you through all your options.


What do you want to happen if you can’t work through a disagreement? One option is to require mediation. If you still can’t resolve a dispute, you can use a buy-sell mechanism (see above) as a tool to go your separate ways (i.e., one of you sells your shares to the other partners). Litigation is also an option, although it is not preferred since it’s expensive and has a unique ability to eviscerate relationships.

A third possible option to build into a partnership agreement to break a dispute or deadlock is to force the sale of the company. If you and your partners can’t come to agreement about something, you agree ahead of time to sell the business as a way of resolving the dispute. It’s a bit draconian, but it’s an option that can help to keep the partners honest.

Setting up mechanisms to resolve deadlocks, stalemates and disputes is critical if you have a 50%/50% partnership. Many lawyers will tell you to steer clear of 50%/50% business relationships, but I think they can work well under the right circumstances. In my experience, 50%/50% partnerships are common, although be sure you know your other 50% cofounder well – 50%/50% partnerships require a lot of compromise, understanding and trust. For more about 50-50 business partnerships, read Are 50/50 Business Partnerships a Good or Bad Idea?

Final Thoughts

Congratulations on going into business with a partner! Great partnerships are amazing vehicles for accomplishing much more in business than you could on your own. However, they require thoughtful consideration upfront when choosing partners, effort laying out the ground rules and documenting the partnership agreement and effort along the way to stay in sync with your partner. I wish you the best success!

If you have questions or want to talk a business lawyer who understands partnership issues and partnership agreements, please get in touch. I also coach business partners (group coaching) and, while I hope you don’t ever need it, I help partners resolve their disputes, sometimes representing a particular partner and sometimes acting as an impartial mediator. Let me know how I can help. You don’t need to be in Austin. I can help you anywhere in Texas and, depending on exactly what you are doing, in other places, as well.

Author: Brett Cenkus

Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.