Startup Advisory
Founders Agreement in India: What to Include and What Most Startups Get Wrong
Lekha Editorial Team
CA-reviewed · Published
The founders agreement you sign when you start is the document that determines what happens when everything goes wrong — when a co-founder wants to leave, when you disagree on a strategic pivot, when you receive an acquisition offer at the worst possible time. Most founders treat it as a formality. The ones who've been through a co-founder dispute never make that mistake twice.
IP Assignment: The Clause Most Founders Forget
The intellectual property clause is the most commonly missing and most consequential clause in Indian founders agreements. It needs to state, explicitly, that any intellectual property created by any founder in connection with the business — code, designs, algorithms, business methods, customer lists, trade secrets — belongs to the company, not to the individual who created it.
Without this clause, there is a serious risk that the founding CTO 'owns' the code they wrote before the company was formally incorporated, or that a departing co-founder has a legitimate IP claim that prevents the company from continuing its core product. VC due diligence almost always includes an IP chain-of-title review, and gaps in IP assignment are one of the most common reasons investment rounds are delayed or renegotiated.
The assignment clause should cover: work created before incorporation (especially important if you've been working on the idea for months before registering the company), work created during employment if founders have day jobs (conflict of interest), and work created by co-founders who are advisors or consultants rather than employees.
Decision-Making and Deadlock Resolution
Most founders agreements say nothing about decision-making protocols — founders assume they'll talk through disagreements as they arise. This works until it doesn't. The failure mode is deadlock: the two 50/50 founders cannot agree on whether to raise a round, whether to hire a specific candidate, or whether to pivot the product. Without a mechanism to break the deadlock, the company stalls.
Decision rights should be tiered by importance. Operational decisions (hiring, vendor selection, product prioritisation) should be delegated to the functional founder responsible for that area — the CTO decides technical architecture, the CEO decides sales strategy. Board-level decisions (raising a round, issuing new shares, taking on debt, selling the company) require majority board consent. Extraordinary decisions (amendment of the founders agreement itself, changing the share capital structure) require unanimous founder consent.
For the truly stuck decisions, two mechanisms work: a defined CEO with the final say on operational matters (overrides the 50/50), or a predetermined third-party arbitrator (often an agreed-upon advisor or investor who has the right to cast a deciding vote). The mechanism must be agreed before the deadlock arises, not during it.
Departure Provisions That Actually Work
The departure provisions cover what happens when a founder exits — voluntarily, involuntarily, or due to death or permanent incapacity. These are the clauses that determine whether a departure is clean or litigated.
Good-leaver vs bad-leaver: a 'good leaver' (someone who leaves due to death, disability, or termination without cause) typically retains their vested equity. A 'bad leaver' (voluntary resignation, termination for cause) typically forfeits unvested equity and may have their vested equity subject to a buyback at par value. The definition of 'cause' should be explicit — fraud, breach of fiduciary duty, conviction of a crime — not loose enough to be weaponised in a heated departure.
Buyback mechanics: the company or remaining founders should have a right of first refusal on a departing founder's shares before they can be transferred to any third party. The buyback price should be specified — either par value (for bad leavers), fair market value at the time of departure (for good leavers), or a formula. Open-ended fair market value disputes are the most common source of litigation.
Non-compete and non-solicitation: a 12-month non-compete (not working for a directly competing company) and 24-month non-solicitation (not hiring the company's employees or approaching its customers) is standard and enforceable in most Indian courts if drafted correctly. The scope must be reasonable — too broad and Indian courts may refuse to enforce it.
Key takeaway
Spend 5–10 hours and ₹15,000–₹30,000 on a proper founders agreement at incorporation. The alternative is spending ₹10 lakh–₹1 crore on a lawyer when it falls apart. The document is an insurance policy — you pay a small amount now to avoid a large cost later.
Frequently asked questions
Is a founders agreement legally enforceable in India?
Yes. A founders agreement is a contract under the Indian Contract Act, 1872, and is enforceable in Indian courts subject to standard contract law principles (free consent, lawful object, consideration). Courts have routinely enforced founders agreement clauses including vesting provisions, non-competes, IP assignment, and buyback rights. The key requirements for enforceability are that all parties sign with full understanding, the terms are not unconscionable, and the agreement doesn't conflict with the company's articles of association or applicable law.
Can a founders agreement be amended after signing?
Yes, but amendments typically require unanimous consent of all signing founders (as specified in the agreement). Any amendment should be documented in writing, signed by all parties, and treated as a formal addendum to the original agreement. Verbal amendments to a written founders agreement are generally unenforceable in Indian courts. If your business circumstances have changed significantly from when you signed the original agreement (new co-founder joined, one left, business pivoted), a formal amendment or complete restatement is advisable.
Should the founders agreement be registered?
In India, private contracts between companies and/or individuals do not need to be registered to be valid or enforceable (registration is required for specific instruments like immovable property transfers, but not for general commercial contracts). Founders agreements are private contracts and are not registered. However, keeping original signed copies (physical or digitally verified) in a secure location is important, especially if the agreement is ever relied upon in a dispute.
What is the difference between a founders agreement and shareholder agreement?
A founders agreement is typically signed at or near incorporation, before external investors join. It governs the relationship between founding team members. A shareholder agreement is broader and includes investors as parties — it governs the relationship between all shareholders (founders and investors). When investors join, they typically negotiate a SHA (Shareholders Agreement) that supersedes or supplements the founders agreement on company governance matters. The founders agreement provisions on IP assignment, vesting, and non-compete often survive into the SHA.
What happens if there is no founders agreement and a co-founder leaves?
Without a founders agreement, a departing co-founder retains all their shares with no vesting conditions, no buyback obligation, and no non-compete. They become a passive shareholder — they don't work but they own their equity. This creates two practical problems: the company's cap table shows a significant block controlled by someone who contributes nothing, which is a red flag for investors and makes fundraising harder; and the company has no mechanism to prevent the departing founder from working for a competitor or soliciting its employees.