How to Draft a Founders' Agreement in India: Key Clauses to Cover

Why sign one early?

Co-founder disputes are among the most common reasons early startups fail, and they are far easier to prevent than to resolve. A founders' agreement signed at incorporation, before money or a product exists, keeps the conversation about fairness rather than value. Investors will expect it, or similar terms in a shareholders' agreement, before they put money in.

Equity split and vesting

Record each founder's shareholding and the reasoning, such as idea, capital, time commitment and role. Equity issued at incorporation is usually subject to reverse vesting: the company or other founders can buy back unvested shares at a nominal price if a founder leaves early. A common market pattern is four years with a one-year cliff, but terms should fit your situation. Because Indian company law does not let a company simply cancel shares, vesting is typically implemented through buy-back or transfer obligations written into the agreement and articles.

Roles, time and decision-making

Set out each founder's title, responsibilities and time commitment, and whether outside work is allowed. Decide which decisions need unanimous founder consent, such as raising money, taking debt above a limit, hiring senior staff or changing the business, and which can be taken by a majority or the CEO. Add a deadlock mechanism, such as escalation to an independent adviser or mediation.

• Titles and responsibilities
• Full-time commitment and outside activities
• Board composition and founder seats
• Reserved matters requiring consent
• Deadlock resolution

IP, confidentiality and restrictions

Every founder should assign to the company all IP relating to the business, including work done before incorporation. Add confidentiality obligations that survive exit. Non-solicitation of employees and customers is commonly included. Post-exit non-compete clauses are generally void under section 27 of the Indian Contract Act, though restrictions during employment are treated differently, so draft them carefully.

Exit, leaver terms and transfers

Define good leaver (for example, death, disability or termination without cause) and bad leaver (for example, fraud or breach) and the price at which each must sell back shares. Add a lock-in on transfers for a period, a right of first refusal for co-founders, and tag-along and drag-along rights for a future sale. Specify dispute resolution, often arbitration seated in an Indian city, and governing law.

Timeline and formalities

Draft the agreement alongside incorporation so the shares, articles and founder terms line up from day one. Execute it on non-judicial stamp paper or with e-stamping as required by your state's stamp law; insufficiently stamped agreements cannot be relied on in evidence until the duty and penalty are paid. Review it at each funding round, when investors usually replace it with a shareholders' agreement.

Common mistakes

Equal splits without discussion, no vesting, verbal promises of equity to early employees, IP left with individual founders and agreements that conflict with the AoA are the most frequent problems. Pay the applicable stamp duty so the agreement is admissible as evidence.

Step by step

1. 1Discuss openly

   Agree equity, roles, commitment and exit scenarios.

2. 2Choose vesting

   Set the schedule, cliff and acceleration terms.

3. 3Assign IP

   Include assignment of all past and future business IP.

4. 4Set governance

   Define reserved matters and deadlock resolution.

5. 5Define exits

   Draft good leaver, bad leaver and buy-back pricing.

6. 6Align the AoA

   Mirror transfer restrictions and vesting in the articles.

7. 7Sign and stamp

   Execute on stamp paper as per state law and keep originals.