Founders' agreement template for India

When you need this

• Before or immediately after incorporation, while the equity split is still uncontroversial
• When one founder is contributing capital and another is contributing time
• When a founder is part-time, or still serving out a notice period somewhere else
• Before any investor conversation — vesting is among the first things diligence looks for
• When the code, the domain, the app store account or the brand is still registered in a founder’s personal name

What this document must contain

• The shareholding, and how it is held — The starting point every other clause refers back to. Record it as at the date of the agreement, with each founder’s identifier, so there is no argument later about what the split actually was.
• Vesting, with a cliff and a commencement date — Equity should be earned over time rather than owned on day one. The commencement date matters as much as the schedule — founders who had been building for a year before incorporating should not have that year erased.
• What happens to vested and unvested shares when a founder leaves — Unvested shares should return. Vested shares usually stay. The price and the mechanism have to be written down while everyone is still reasonable, because this is the clause that gets read in the worst possible circumstances.
• Roles, and the decisions each founder can take alone — Most founder disputes are not about equity, they are about who decides. Stating which decisions sit inside a founder’s own function removes a whole category of friction.
• Reserved matters requiring unanimity — Capital, the articles, borrowing beyond a limit, licensing or assigning core IP, selling the business, winding up. This is the short list of things one founder must not be able to do alone.
• Assignment of IP from each founder, including pre-incorporation work — Much of the early work predates the company’s existence. Without an express assignment covering that period, the company does not own the thing it was incorporated to commercialise.
• Transfer restrictions, and an undertaking to put them in the articles — This is the clause that decides whether the agreement means anything against a third party. A restriction that lives only in a private agreement binds the signatories to each other, and no one else.
• A deadlock mechanism — With two founders and unanimity on reserved matters, deadlock is a matter of time. Agree the escalation and the arbitration seat now, when it is an abstract problem rather than a live one.

The law that governs it

• Companies Act, 2013 — s. 58(2) — The securities of a private company are freely transferable, subject to the restrictions contained in its articles of association. A transfer restriction agreed only between founders, and never carried into the articles, does not operate against the company and a transferee in the same way as one that has been. This is the most common reason a carefully drafted founders’ agreement turns out to be unenforceable where it counts.
• Companies Act, 2013 — s. 62 — A further issue of share capital must follow the route the Act prescribes. A founders’ agreement records the commercial understanding, but the corporate action still has to be carried out properly — the agreement cannot authorise an issue the Act’s procedure does not permit.
• Indian Contract Act, 1872 — s. 27 — A covenant restraining a departing founder from carrying on a lawful trade or profession is void to that extent. Non-compete obligations between founders operate during the association; afterwards, the company is protected through confidentiality and intellectual property, not through a restraint on the person.
• Foreign Exchange Management Act, 1999 — Where a founder is not resident in India, the issue and transfer of shares is subject to pricing, reporting and sectoral conditions under FEMA and the rules made under it. A vesting or buy-back mechanism agreed on a whiteboard can be materially harder to execute for a non-resident founder than for a resident one.

Common mistakes

• Splitting equity equally on day one with no vesting, and having nothing to fall back on when a co-founder leaves in month seven holding half the company
• Writing transfer restrictions into the agreement and never amending the articles, which is the only place they bite against a transferee
• Leaving the domain, the repository, the app store account or the trademark registered in a founder’s personal name
• Imposing a post-exit non-compete on a departing founder, which s. 27 will not enforce, in place of the IP and confidentiality terms that would have worked
• Dating vesting from incorporation when the founders had already been building for a year, so real contribution goes uncredited

Frequently asked questions

Is a founders’ agreement legally binding in India?

Yes, as a contract between the people who sign it, subject to the Companies Act, 2013 and the company’s articles prevailing where there is a conflict. What it cannot do on its own is bind the company or a third party on matters the Act reserves to the articles — transfer restrictions being the clearest example.

Do we really need one if there are only two of us?

Two founders is where deadlock is most likely, not least likely: there is no third vote and no tie-break. The agreement is doing more work in a two-founder company than in a four-founder one.

What is a standard vesting schedule?

Four years with a one-year cliff is the common market convention in Indian startups, not a legal requirement — it is a commercial term you can set differently if there is a reason to. What matters legally is that a schedule exists, that the commencement date is written down, and that the treatment of unvested shares on departure is clear.

Does the founders’ agreement survive an investment round?

Usually it is superseded to the extent it conflicts with the shareholders’ agreement signed with the incoming investor. That makes it worth deciding deliberately which of your vesting, leaver and transfer terms you want carried into that document, rather than discovering at closing that they were quietly dropped.

Related documents

• Shareholders' Agreement
• Non-Binding Term Sheet
• Employee Confidentiality & IP Assignment
• All templates