A clear founders agreement for Indian startups can prevent disputes, protect equity, and keep the team aligned. Many first time founders skip this step and only realise the importance when a co founder exits or expectations do not match.
This guide covers why a founders agreement is important in India, key clauses to include, and practical tips on documenting understandings before or along with company registration.
Why every Indian startup needs a written founders agreement
A founders agreement is a contract between co founders that records roles, responsibilities, ownership, and decision making. Even if the startup is still at the idea stage, documenting basic terms can:
- Reduce misunderstandings around who owns what.
- Protect the startup if a founder leaves early.
- Provide a reference during fundraising and due diligence.
- Align co founders on commitment and contribution.
For Indian startups, a founders agreement can be executed as a simple contract on appropriate stamp paper, and later aligned with the company articles and shareholding.
Core commercial terms in a founders agreement for Indian startups
When drafting a founders agreement for Indian startups, focus on these core commercial points:
1. Equity split and ownership
- Percentage share for each founder.
- Initial shareholding versus future pool for ESOPs.
- Treatment of past work or intellectual property created before agreement.
2. Roles and responsibilities
- Who looks after product, technology, sales, finance, legal, or operations.
- Time commitment expectations for each founder.
- Whether any founder can continue side projects and under what conditions.
3. Decision making and voting
- Matters that require unanimous consent, for example raising funds or selling the company.
- Matters where majority or CEO decision is sufficient.
- Tie breaking mechanism if there are only two founders.
Vesting and founder exit provisions
Vesting is one of the most important parts of a founders agreement for Indian startups. Typical approaches include:
1. Time based vesting
- Equity vests over a period, for example 4 years with 1 year cliff.
- If a founder leaves before the cliff, most or all shares are treated as unvested.
2. Good leaver and bad leaver concepts
- Good leaver could be a founder who leaves due to health reasons or agreed transition.
- Bad leaver could be a founder who resigns to join a competitor or is terminated for misconduct.
- Different repurchase price or forfeiture rules can apply for good and bad leavers.
3. Company or remaining founders purchase rights
- Company has the first right to buy unvested or certain vested shares.
- Remaining founders may have secondary rights to purchase if company does not.
These provisions protect the startup from having inactive co founders holding large equity without contributing.
Intellectual property, confidentiality, and non compete
Every founders agreement for Indian startups should clearly address intellectual property and confidentiality:
- All intellectual property created by founders for the startup should be assigned to the company.
- Founders should confirm that they are not infringing any third party rights or obligations.
- Confidential information of the startup should not be shared with outsiders without consent.
- Reasonable non compete and non solicitation clauses may be included, keeping Indian contract law enforceability in mind.
Dispute resolution, governing law, and miscellaneous terms
Other important boilerplate provisions include:
- Governing law clause specifying that the agreement is governed by Indian law.
- Dispute resolution mechanism such as arbitration or courts of a specific city.
- Process for amending the founders agreement when new investors come in.
- Survival of confidentiality and intellectual property obligations even after a founder exits.
While these may look standard, they have significant impact in case of a real dispute.
Practical tips for drafting a founders agreement in India
Some practical suggestions when working on a founders agreement for Indian startups:
- Have an open discussion on expectations and risk before writing clauses.
- Keep commercial terms simple and easy to understand.
- Align the founders agreement with the memorandum and articles of association when the company is incorporated.
- Update the agreement at major milestones such as funding rounds.
- Execute the agreement on appropriate stamp paper and keep signed copies safely.
Related posts
Related: Checklist for incorporating a private limited company for startups in India (link: /blog/incorporation-checklist-startups-india)
Related: ESOP basics for Indian startups and early stage employees (link: /blog/esop-basics-indian-startups)
Related: Common co founder disputes in Indian startups and how to prevent them (link: /blog/cofounder-disputes-india)
