Founder’s agreement vs. shareholder agreement: setting the course for startups at an early stage

Many start-ups are born out of a spontaneous idea, often between friends, fellow students or former colleagues from a previous project. In the euphoria of the early days, product development, customer acquisition and initial financing rounds are at the top of the priority list. Legal issues are often postponed, often out of the conviction that they “know each other” and can therefore solve problems somehow. This approach is understandable, but carries a considerable risk: a lack of or unclear contractual basis can paralyze a young company in the early stages – and often at a time when the project is at its most vulnerable. One of the biggest mistakes is to think that the shareholder agreement is a comprehensive set of rules that automatically covers all aspects of the collaboration. In reality, it is primarily a formal and legally prescribed foundation that deliberately leaves important operational questions unanswered. If this gap is not closed by supplementary documents such as a founder’s agreement or rules of procedure, there is a risk that internal conflicts will escalate unchecked.

The shareholder agreement – formal framework without automatic obligation to work

The shareholders’ agreement is at the heart of every corporation. In the case of a GmbH or UG, it is a document that must be notarized and without which the company does not exist. It contains legally mandatory information such as the company name, registered office, object of the company, the amount and distribution of the share capital and the individual shares. In addition, there are often individually agreed clauses that are tailored to the specifics of the company, such as pre-emption rights, drag and tag-along regulations, liquidation provisions or special approval requirements for important business decisions.

However, what it does not automatically contain – and this is surprising for many founders – are obligations to actively collaborate. The shareholder agreement does not establish any obligation under employment law or service contract. Even if a founder was significantly operationally active at the beginning, he can later withdraw completely from the day-to-day business without this constituting a breach of contract from a company law perspective alone. This legal “loophole” can create considerable tension: the team expects to be actively involved, while a co-partner is effectively just waiting for his share of the profits. Without supplementary agreements, this can neither be prevented nor sanctioned. This shows that the shareholder agreement in its basic form primarily defines the legal structure of the company, but not its operational reality.

The Founder’s Agreement – binding rules for operational cooperation

A founder’s agreement is essentially a contract between the founders that sets out the day-to-day cooperation, the expectations of the work commitment and the strategic direction in a binding manner. Unlike the shareholders’ agreement, it is not a legally prescribed document, but a voluntary but extremely important instrument in practice. The decisive advantage: it can be concluded without notarization and can be adapted at any time as soon as the company’s needs change.

A comprehensive Founder’s Agreement goes far beyond mere declarations of intent. For example, it specifies exactly how much time each founder must contribute to the company – be it full-time, part-time or project-based – and what specific responsibilities exist. It can provide for detailed milestones, for example for product development, customer acquisition or the implementation of certain marketing strategies, and link these to contractual consequences. Another key element is the transfer of all resulting intellectual property rights to the company in order to avoid disputes at a later date. This is particularly essential in technology-driven start-ups to ensure that the code, designs or trademark rights do not remain the property of individual founders.

In addition, a well-designed founder’s agreement allows the introduction of vesting rules that ensure that shares are only finally acquired gradually – and only as long as the founder is actively involved or achieves agreed targets. This protects the company from a situation where an inactive founder retains a large shareholding in the long term even though he or she is no longer making a contribution. Investors often regard the lack of such regulations as a considerable risk. Last but not least, a founder’s agreement can also contain provisions for conflict resolution, for example through mediation procedures or binding arbitration clauses, in order to avoid lengthy legal disputes.

The rules of procedure – institutional procedures and decision-making processes

Rules of procedure supplement the two aforementioned documents by defining internal procedures and decision-making processes at an institutional level. They are particularly relevant for the management, but can also structure the cooperation of the shareholders in the shareholders’ meeting. In many cases, rules of procedure are adopted at the shareholders’ meeting and are therefore easier to adapt than the notarized articles of association.

The rules of procedure can precisely define the areas of responsibility of individual managing directors, which transactions require their prior approval and how reporting obligations to the shareholders are structured. They regulate how often meetings are held, what deadlines apply to invitations and how resolutions are to be documented. Such clear structures prevent misunderstandings, shorten decision-making processes and provide security, especially when the company grows or new shareholders join.

The key difference to the Founder’s Agreement is that the rules of procedure do not primarily relate to the personal performance of the founders, but to the functioning of the company’s bodies. While the Founder’s Agreement regulates what the individual founders must achieve as persons, the rules of procedure create an institutional framework within which these achievements are translated into entrepreneurial action.

Typical errors and their consequences

One of the most serious mistakes is the assumption that the shareholder agreement automatically contains all relevant obligations and expectations. This leads to operational gaps not being closed. In practice, this often means that a founder who no longer wants to be actively involved remains fully involved. This can not only destroy the motivation of the remaining founders, but can also lead to serious problems when looking for investors.

Another common omission is the lack of regulations on the transfer of intellectual property. In the tech sector in particular, it is essential that all work results – whether source code, databases, designs or brands – are automatically transferred to the company. Without clear regulations, it can happen that an individual founder retains certain core rights after leaving the company, which jeopardizes the entire business model. It is equally problematic to dispense with vesting rules or to regulate them only superficially. This can lead to someone receiving shares at the outset and retaining them permanently, even if they leave the company after a short time.

A third mistake is that the various documents are not coordinated with each other. If the shareholders’ agreement provides for a certain regulation, but the founder’s agreement provides for something else, conflicts of interpretation arise that can lead to lengthy legal disputes in the event of a dispute. Investors also become skeptical when there are contradictory provisions and often demand cost-intensive adjustments before providing capital.

Relevance for investors

Investors see a clear and consistent contract architecture as a sign of professionalism and long-term planning. They not only check whether the shareholder agreement is formally correct, but also want to know whether operational obligations are clearly regulated, whether intellectual property is secured and whether there is a fair incentive system for the founders. The existence of a detailed founder’s agreement and functioning rules of procedure can make the difference between an investment being made or not.

In the absence of such regulations, questions immediately arise from an investor’s perspective: What happens if a founder leaves? Who owns the core rights? Who decides in critical situations? How are conflicts resolved? The clearer these points are regulated, the lower the perceived risk – and the more willing an investor will be to invest in the company.

Conclusion: Three levels for a stable foundation

A stable startup is not only based on a good idea and a strong team, but also on a solid legal and organizational foundation. The shareholder agreement creates the necessary legal framework, the founder’s agreement ensures clear operational obligations and mutual expectations, and the rules of procedure ensure that the corporate bodies can work efficiently.

Those who set up all three levels properly at an early stage avoid later conflicts, save costs and create trust among investors, employees and business partners. The decisive advantage is that founders can focus their energy on growth and innovation instead of arguing about fundamental issues of cooperation in times of crisis.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.