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This article develops a theory of contracting among founders of a new firm.
It asks at what stage founders agree to commit to each other, how they structure
optimal founder contracts, and how this affects team formation, ownership,
incentives, and performance. The article derives a trade-off between upfront
contracting, which can result in teams with ineffective founders, versus delayed
contracting, which can enable some founders to appropriate ideas and start
their own firms. Delayed contracting becomes more attractive when there are
significant doubts about the skills of founders. We show that contingent contracts
with vesting of shares may be used to mitigate inefficiencies in the team
formation process. We also show that laws that provide protection to implied
partnerships may have the unintended effect of encouraging more formal
contracting
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