Co-founder disputes are among the most common reasons early-stage startups fail. A handshake works while everything is going well. A founders' agreement is what protects the company when a co-founder loses interest, wants to leave, or disagrees about the direction. It is far easier to agree on these terms on the first day than in the middle of a dispute.

1. Equity split

Record each founder's shareholding and the basis for it: capital contributed, time commitment, intellectual property brought in, and role. Equal splits are common but not always fair. What matters is that the split is deliberate and documented.

2. Vesting and cliff

Vesting means founders earn their shares over time, so someone who leaves early does not walk away with a large stake. A common structure is:

  • four years of vesting with a one-year cliff: nothing vests if a founder leaves within the first year, and shares then vest monthly or quarterly;
  • acceleration on certain events, such as an acquisition.

Since Indian companies usually issue shares upfront, "reverse vesting" is used in practice. The company or the other founders get the right to buy back unvested shares at a nominal price when a founder leaves.

3. Roles and time commitment

Set out each founder's title, responsibilities and whether they must work full-time. Say what happens if a founder takes up other employment or ventures.

4. Intellectual property assignment

Every founder should assign to the company all IP created for the business, including code, designs, brand and content, including work done before incorporation. Investors will check this during due diligence. Missing IP assignments are a common reason funding rounds get delayed.

5. Confidentiality

Founders must keep the company's confidential information confidential during their involvement and after they leave. This obligation is generally enforceable.

6. Non-compete and non-solicit: the Indian position

Under Section 27 of the Indian Contract Act, 1872, any agreement that restrains a person from carrying on a lawful profession, trade or business is void, except in limited cases such as the sale of goodwill. Indian courts have consistently held that post-exit non-compete clauses for individuals are generally unenforceable. Restrictions that apply while the person is still a founder or employee are treated differently.

What usually works better:

  • non-solicitation of employees and customers, drafted reasonably;
  • strong confidentiality and IP protections;
  • reverse vesting, which gives founders a financial reason to stay.

7. Decision-making and deadlock

Specify which decisions need unanimous founder consent, for example raising funds, issuing shares, taking on large debt, selling the company or changing the business. Include a deadlock mechanism: escalation to a mentor, mediation, and as a last resort a buy-sell ("shotgun") clause.

8. Share transfer restrictions

  • Lock-in: founders cannot sell shares for a set period.
  • Right of first refusal (ROFR): existing founders get the first chance to buy any shares being sold.
  • Tag-along / drag-along: minority holders can join a sale, and the majority can require minority holders to join an approved sale.

9. Founder exits: good leaver and bad leaver

Define what happens to a departing founder's shares:

  • a good leaver (death, disability, or leaving by mutual agreement) may keep vested shares or be bought out at fair value;
  • a bad leaver (fraud, material breach, or joining a competitor while still bound) may be bought out at a nominal or discounted price.

10. Dispute resolution

Provide for arbitration under the Arbitration and Conciliation Act, 1996, with a stated seat, the number of arbitrators and the language. It is private and usually faster than civil courts.

Making it enforceable against the company

Under Indian company law, restrictions on share transfers bind the company only if they are reflected in its Articles of Association. This follows from V.B. Rangaraj v. V.B. Gopalakrishnan (1992) and later decisions. Once the company is incorporated, key terms from the founders' agreement should be carried into the Articles or a shareholders' agreement to which the company is a party.

Also pay the correct stamp duty on the agreement, based on the state where it is signed. An unstamped agreement cannot be admitted in evidence until the duty and any penalty are paid.

Key takeaways

  • Sign a founders' agreement early, ideally before or at incorporation.
  • Use reverse vesting with a cliff to protect the company from early exits.
  • Assign all IP to the company, including work done before incorporation.
  • Post-exit non-competes are generally void in India, so rely on confidentiality, non-solicit and vesting instead.
  • Reflect transfer restrictions in the Articles of Association.