Founders' Agreements in India: What to Include and Why You Need One

Most startups begin with two or three people and a handshake. That works while everyone agrees. It stops working when one co-founder wants to leave, contributes less than expected, or disagrees about where the company is going, and by then it's much harder to agree on terms. A founders' agreement settles those questions at the start, while everyone is still on the same side. This guide explains what it should cover under Indian law.

What a Founders' Agreement Is

A founders' agreement is a contract between the co-founders, and usually the company once it's incorporated, recording how they'll own and run the business together. It's governed by the Indian Contract Act, 1872. It isn't a legal requirement, but it's one of the first documents investors ask about, and one of the most useful when things go wrong.

It's best signed before or immediately after incorporation, and definitely before the company raises money or hires its first employees.

What It Should Cover

Equity split

Who owns what percentage of the company, and on what basis. Equal splits are common, but not always right: the split should reflect what each founder is contributing in time, capital, skills and ideas.

Vesting

Vesting means founders earn their shares over time rather than owning them outright from day one. A common structure is four years with a one-year cliff: nothing vests in the first year, then a quarter vests, and the rest vests monthly or quarterly. If a founder leaves early, their unvested shares go back to the company or the other founders. Without vesting, a co-founder who leaves after three months can keep a large stake in a company they no longer work for.

Roles and decision-making

• Each founder's role, title and responsibilities.
• Which decisions need unanimous agreement, such as raising money, taking on debt, hiring senior people or selling the company.
• How deadlocks are broken.

IP assignment

Everything the founders create for the business, code, designs, content, brand, should belong to the company, not to the individual founders. The agreement should assign it in writing. Under the Copyright Act, 1957, if an assignment doesn't state its duration and territory, it's presumed to be for five years and for India only, so a good assignment expressly covers the full term of protection and all territories.

Leaving the company

• What happens to a departing founder's vested and unvested shares.
• Good leaver and bad leaver terms: whether shares are bought back at fair value or at a lower price, depending on why the founder is leaving.
• Notice periods and handover obligations.

Confidentiality and non-solicit

Founders should keep the company's information confidential, during and after their time with it, and not poach its employees or clients for a reasonable period after leaving. A broad non-compete that stops a founder from working in the industry after they leave is generally unenforceable in India under Section 27 of the Contract Act, so the agreement should rely on confidentiality, non-solicit and IP protections instead.

Transfer restrictions

Rights of first refusal, lock-ins, and tag-along and drag-along rights, so shares don't end up with outsiders without the other founders' consent.

Make It Consistent With the Articles

Once the company is incorporated, key terms like transfer restrictions and share buy-backs should also be reflected in its Articles of Association. The articles bind the company and all its shareholders. If the founders' agreement and the articles contradict each other, the articles generally prevail against the company.

Stamping and Signing

A founders' agreement should be stamped under the stamp law of the state where it's signed. It can be signed with Aadhaar e-sign or a digital signature certificate, which are valid under the IT Act, 2000.

Common Mistakes

• Not having one at all, because "we're friends."
• Equal equity with no vesting.
• IP left with the founders who created it.
• Relying on a post-exit non-compete that won't hold up.
• Terms that contradict the company's articles.

Getting Help

Think Filing's lawyers draft founders' agreements tailored to your team, covering equity, vesting, IP, decision-making and exits, and align them with your company's articles.