Why do Australian startup co-founders need a written agreement?

Without a written Co-Founder Agreement, the rights and obligations of co-founders in an Australian startup are governed by the general law of contract, the applicable state Partnership Act (if the founders are operating as a partnership), and — after incorporation — the Corporations Act 2001 (Cth) and the company's Constitution. These default legal frameworks do not address the specific arrangements between co-founders and leave many critical questions unanswered: What happens to a co-founder's equity if they leave after six months? Who owns the intellectual property created before the company was incorporated? What happens if the founders cannot agree on a major strategic decision? A written Co-Founder Agreement answers all of these questions from the outset, reducing the risk of costly disputes that could destroy the startup. Investors and accelerators will invariably require founders to have a written agreement in place before they invest.

How does vesting work for co-founders in Australia?

Vesting is a mechanism by which a co-founder earns their equity stake over time, rather than receiving it all upfront. In Australian startups, the most common vesting schedule is a four-year vesting period with a twelve-month cliff. Under this structure, no equity vests during the first twelve months. On the twelfth-month anniversary, 25% of the founder's equity vests in one block. After that, the remaining 75% vests ratably on a monthly basis over the subsequent 36 months. If a founder leaves before the cliff, they forfeit all unvested (and possibly all vested) equity depending on whether they are classified as a good leaver or bad leaver. Vesting protects the company and the remaining founders from a scenario where a co-founder departs early but retains a large equity stake that was earned only by showing up for the first few months.

Who owns intellectual property created before a company is incorporated in Australia?

Under Australian law — specifically the Copyright Act 1968 (Cth) and the Patents Act 1990 (Cth) — intellectual property created by an individual before a company is incorporated belongs to that individual, not to the company that is subsequently formed. This creates a significant risk for startups: the core technology or software may be owned by one of the founders personally, not by the company. If that founder later leaves, they could potentially take their IP with them or use it to compete with the company. A Co-Founder Agreement should include a comprehensive IP assignment clause that transfers all pre-existing and future IP to the company, whether the IP was created before or after the company's incorporation. The assignment should also address moral rights under the Copyright Act 1968 (Cth), which are personal rights that cannot be assigned but can be waived.

What is the difference between a good leaver and a bad leaver?

Good leaver and bad leaver provisions determine what happens to a departing founder's shares — specifically their unvested shares and, in some cases, even their vested shares. A 'good leaver' is a founder who departs for reasons outside their control or through no fault of their own — typically death, permanent disability, serious illness, or termination without cause. A good leaver generally retains all their vested shares and may receive a buyout of their unvested shares at fair market value, or the unvested shares are simply forfeited without penalty. A 'bad leaver' is a founder who departs for any other reason — including voluntary resignation, termination for cause, or a material breach of the Co-Founder Agreement. A bad leaver typically forfeits all unvested shares for nil consideration and may also be required to sell their vested shares at a discount (for example, at the original issue price rather than fair market value). These provisions are critical for protecting the company and remaining founders from departing co-founders who leave but retain significant equity.

Are non-compete clauses in a Co-Founder Agreement enforceable in Australia?

Non-compete clauses in co-founder agreements are enforceable in Australia provided they go no further than is reasonably necessary to protect a legitimate business interest. Australian courts apply the common law restraint of trade doctrine, under which a restraint must be reasonable as to scope, duration, and geography. In New South Wales, the Restraints of Trade Act 1976 (NSW) gives courts the power to read down an unreasonably broad restraint to the minimum extent necessary to make it enforceable. In other states, a restraint that is too broad may simply be void at common law. Courts in Australia generally give more latitude to restraints in commercial agreements (such as co-founder agreements and shareholders agreements) than in employment agreements, because the parties are presumed to be of equal bargaining power. A restraint of 12 months duration covering Australia is likely to be enforceable for a co-founder who had access to the company's confidential information, IP, and customer relationships.

Co-Founder Agreement (Australia) — Australia

Create a Co-Founder Agreement for an Australian startup venture — whether pre-incorporation or after company registration. Covers equity split, vesting schedule with cliff period, IP assignment, roles and responsibilities, decision-making authority, sweat equity contributions, good/bad leaver provisions, non-competition, non-solicitation, confidentiality, and dispute resolution. Suitable for all Australian states and territories.

What Is a Co-Founder Agreement (Australia)?

A Co-Founder Agreement is a written contract between the founders of a startup venture — typically entered into at the pre-incorporation stage or immediately after the company is registered — that establishes the terms of their working relationship and the rules for building the company together. It is sometimes called a Founder's Agreement, Startup Agreement, or Pre-Incorporation Agreement.

In Australia, startup companies are typically incorporated as proprietary companies limited by shares (Pty Ltd) under the Corporations Act 2001 (Cth), registered with the Australian Securities and Investments Commission (ASIC). However, the company may not be incorporated at the time the founders first agree to work together. A Co-Founder Agreement can be entered into before incorporation — addressing the pre-incorporation period and creating contractual obligations between the founders that will be novated to the company once it is formed.

A Co-Founder Agreement differs from a Shareholders Agreement in that it is designed specifically for the early-stage startup context. It addresses the unique dynamics of founding teams: the unequal contributions of different founders (some may bring technology or IP, others may bring capital or business relationships), the risk that a co-founder may leave early without having contributed meaningfully to the company's success, the need to ensure that the company owns all intellectual property created by the founders, and the importance of clearly defining each founder's role and decision-making authority.

Australian accelerators — including StartupAUS programs, Startmate, Antler, and university-based incubators — strongly recommend that founding teams have a Co-Founder Agreement in place before applying for or accepting investment. Venture capital funds and angel investors will scrutinise the founders' agreement as part of their due diligence and will require the agreement to contain appropriate IP assignment, vesting, and good/bad leaver provisions before making an investment.

When Do You Need a Co-Founder Agreement (Australia)?

A Co-Founder Agreement is needed as soon as two or more people agree to build a startup together and one of the following occurs: they begin working on the venture in a serious capacity; one founder contributes IP, code, or other valuable assets to the venture; the founders approach investors or apply to an accelerator program; or the founders are ready to incorporate the company.

The most dangerous time to be without a Co-Founder Agreement is the early stage, when founders are working on the venture without any formal legal framework and before any value has been created. This is because the most common and damaging disputes between co-founders tend to relate to issues that arise at the outset — equity allocation, who owns the technology, and what happens when one founder decides to leave.

Common scenarios in which a Co-Founder Agreement is urgently needed include: a technical founder and a business founder who are building a product together and need to document their equity split and contributions; two or more friends who are building a startup on the side of their existing jobs and need to address what happens if one of them is offered a full-time role elsewhere; founders applying to join an accelerator or pitch to angel investors, who will require the founders to have a written agreement in place; a solo founder who is bringing on a new co-founder and needs to document the equity split and vesting terms; and any situation where the founders have agreed on an equity split verbally and need to put it in writing before anyone begins to question the arrangement.

It is important to execute a Co-Founder Agreement before significant value is created, because the earlier the agreement is in place, the less room there is for dispute about what was originally agreed. Once a startup begins to attract customer interest, investment, or media attention, the stakes — and the potential for disputes — increase dramatically.

What to Include in Your Co-Founder Agreement (Australia)

A comprehensive Australian Co-Founder Agreement should address the following key elements to protect all founders and the company.

Equity split: The agreement must clearly document the equity allocation between the founders, including the percentage each founder is entitled to upon full vesting. The rationale for the equity split should also be recorded to prevent future disputes about whether the allocation was fair.

Vesting schedule with cliff: A vesting schedule is arguably the most important element of a Co-Founder Agreement. A standard four-year vesting schedule with a twelve-month cliff protects the company and the remaining founders from the risk of a co-founder leaving early with a large equity stake. The cliff means no equity vests in the first year — a founder who leaves before the twelve-month cliff forfeits all their shares.

IP assignment: Every Co-Founder Agreement must include a comprehensive IP assignment clause. Under Australian law, IP created by an individual belongs to that individual unless there is a written assignment to the contrary. The assignment should cover all pre-existing IP contributed to the company, all IP created during the founder's involvement, future improvements, and associated moral rights waivers under the Copyright Act 1968 (Cth).

Roles and contributions: The agreement should clearly define each founder's role, title, areas of responsibility, and minimum time commitment. It should also document the non-cash contributions (sweat equity) each founder is making, including any IP, customer relationships, or prior work product contributed to the venture.

Good and bad leaver provisions: These provisions determine what happens to a departing founder's unvested — and in some cases vested — shares depending on the circumstances of their departure. Good leaver provisions protect founders who leave for reasons beyond their control; bad leaver provisions protect the company and remaining founders from founders who leave voluntarily or for cause.

Non-competition and confidentiality: Restraint provisions prevent a departing founder from using their knowledge of the company's technology, customers, and strategy to compete with the company. Confidentiality obligations protect the company's trade secrets after a founder's departure.

Decision-making: The agreement should specify which decisions each founder can make unilaterally, and which require the agreement of all founders — including major financial commitments, hiring decisions, and strategic pivots.

What Is a Co-Founder Agreement (Australia)?

When Do You Need a Co-Founder Agreement (Australia)?

What to Include in Your Co-Founder Agreement (Australia)

Frequently Asked Questions

Related Documents

Shareholders Agreement (Australia)

Company Constitution (Australia)

Non-Disclosure Agreement (NDA) (Australia)

Partnership Agreement (Australia)