Founders’ Agreement Checklist for Indian Startups

What should founders agree before splitting equity?

Founders should first record what each person contributes and is expected to contribute: cash, existing intellectual property, full-time or part-time work, relationships and responsibilities. An equity split agreed without this context is often reopened later under pressure. Distinguish contributions already made from promises that depend on continued involvement over several years.

Prepare a short contribution schedule showing deliverables, timelines and how completion will be evidenced. A technical founder might own architecture and early hiring, while a commercial founder owns customer discovery and contracts. State whether outside consulting, another business or further study is allowed and how conflicts of interest must be disclosed.

Keep shareholding separate from salary, reimbursement and authority to bind the company. Define who approves borrowing, hiring, related-party transactions and changes in the business model. Equal ownership does not require every operational decision to be unanimous, but sensitive matters should have a clear approval threshold that the board and founders actually follow.

How should vesting and time commitment work?

Vesting links each founder’s economic entitlement to continued contribution, so an early departure does not leave a large shareholding disconnected from work. Four years with a one-year cliff is common, but Indian law does not prescribe it. The schedule must fit the company’s actual shareholding and a lawful way of implementing it under Indian company law.

Record the vesting start date, how pre-incorporation work is treated, how often shares vest after the cliff and whether vesting accelerates on an acquisition or termination without cause. Cover illness, parental leave and an agreed move to part-time work. Avoid vague tests such as satisfactory service unless the agreement explains who decides and how disputes are settled.

Shares already issued do not simply lapse when a founder leaves. Transfers, buy-backs, capital reduction or option structures each carry company-law, tax, valuation, stamp-duty and, for non-residents, FEMA consequences. Agree the commercial outcome first, then choose compliant mechanics rather than copying an overseas reverse-vesting template that may not work in India.

Who should own the intellectual property founders create?

The company should hold documented rights to the intellectual property it needs, such as code, designs, brand assets, inventions, data and documentation. A founder’s involvement does not automatically make the company the owner. Identify existing material separately from work created for the venture, and take written assignments to the company once it is incorporated.

List background intellectual property, including anything excluded from assignment or licensed to the company on limited terms. Check former employment contracts, university policies, contractor agreements and open-source licences. If a founder brings software written elsewhere, establish a clear chain of title before presenting it to customers or investors as the company’s asset.

Back up assignment clauses with practical controls: company-owned code repositories, domains and cloud accounts, managed credentials and an exit handover process. Confidentiality clauses should define protected information, permitted disclosures and return or deletion on exit. Non-solicitation of employees and customers should be narrowly drafted, because enforceability depends on the wording and facts.

How should good-leaver, bad-leaver and exit terms work?

Leaver provisions decide what happens to a departing founder’s shares, role and access to information. Good leaver and bad leaver have no fixed statutory meaning in India, so define each category, the decision process and the consequences precisely, including how disputed allegations of misconduct or non-performance will be resolved.

Consider death, disability, resignation, termination without cause, proven fraud and material breach separately. Explain what happens to vested and unvested shares, who may buy them, how they will be valued and when payment is due. Do not assume a heavy discount or compulsory transfer will be enforceable simply because every founder signed.

Plan voluntary exits alongside future fundraising and sale terms. Transfer restrictions, rights of first refusal, tag-along and drag-along rights should work together without conflicting notice periods. Resigning as an employee or director does not by itself end share ownership, so the agreement and the articles must align on transfers and handovers.

How can founders handle deadlock and restrictive covenants?

A deadlock clause should define which unresolved decisions count and set a timed escalation route before any forced separation. Start with structured founder discussion, then mediation or another agreed process. Keep buy-sell or compulsory sale mechanisms for genuine deadlock, after testing how valuation and funding would actually work for each founder.

Separate ordinary disagreements from reserved matters needing enhanced consent. A budget dispute should not stop payroll or customer service, so set interim operating rules. Specify governing law, the dispute forum or arbitration seat, notice addresses and access to urgent interim relief, and how a conflicted director takes part in board decisions during a dispute.

Indian law limits restraints of trade. Section 27 of the Indian Contract Act, 1872 makes agreements restraining a lawful profession, trade or business void to that extent, subject to its exception. Post-exit non-compete clauses are therefore hard to enforce, and non-solicitation clauses are not automatically valid. Have an independent advocate review this wording.

How does the agreement connect with investor documents and ESOPs?

A founders’ agreement usually records the original bargain among founders, but it must stay consistent with later investment documents and the articles of association. A new shareholders’ agreement does not automatically cancel earlier inconsistent promises. Review precedence, amendment and termination clauses whenever ownership or governance changes after a funding round.

A shareholders’ agreement governs continuing shareholder rights such as board seats, reserved matters and transfer restrictions. A share subscription agreement documents a specific investment: subscription amount, conditions, warranties and completion. Some deals combine the two. Identify which founder terms survive, which are replaced, and which must be reflected in the articles to bind the company.

An ESOP needs a separate scheme with its own eligibility, vesting, exercise and administration terms, approved by the required board and shareholder resolutions. Mentioning an option pool in a founders’ agreement does not grant options. Valuations for allotments and FEMA pricing for non-resident investors must still be dealt with at each issue.

What practical checklist should founders work through?

Before signing, founders should be able to answer a short list of questions in writing: who owns what today, what each person will do and for how long, how shares vest, who owns the IP, what happens if someone leaves, how deadlock is resolved and how the agreement fits the articles. Gaps in any answer usually signal a future dispute.

Work through the checklist together, then share the agreed term sheet with an independent advocate for drafting or review where required, and with the company’s CA for share-capital, tax and valuation points. Keep the signed agreement with the board minutes, share register, IP assignments and any employment or consultancy contracts with founders.

Revisit the checklist at each milestone. A first hire, a pre-seed round or a move overseas by one founder can change what is fair and what is enforceable. Updating the agreement while relationships are good is far easier than renegotiating terms during a disagreement or under pressure from an incoming investor.

Finally, keep the agreement readable. Founders should be able to explain each clause in plain language to a new co-founder or investor. If a clause cannot be explained simply, it is likely to be misunderstood or disputed later. Short schedules for contributions, vesting and IP make the agreement easier to update as the business grows.

How do a founders’ agreement, shareholders’ agreement and share subscription agreement differ?