What are the essential clauses for a Founders' Agreement in India?

A Founders' Agreement is a written contract between the co-founders of a startup, setting out roles, equity, IP ownership, and exit terms. It is enforceable under the Indian Contract Act, 1872, and supplements the Articles of Association and the (later) Shareholders' Agreement.

Without one, every founder dispute defaults to the Companies Act framework — which is hostile to startups and slow to enforce. With one, you have:

(1) Clear roles and decision-making;
(2) Defined vesting — so a co-founder who walks out in 6 months doesn't keep 33% of the company;
(3) IP locked into the company — not held personally by any founder;
(4) Predictable exits — for resignation, termination, death or deadlock;
(5) Investor-readiness — VCs ask for the Founders' Agreement in their due diligence.

Engage a reputable, specialised corporate/startup lawyer to draft. Cost: ₹25,000-₹1,50,000 depending on complexity.

Equity split — the default among co-founders is equal, but adjust for:
(1) Idea originator (+5-15%);
(2) Full-time vs part-time commitment;
(3) Capital contribution;
(4) Domain expertise / network value;
(5) Risk taken (e.g., quitting a stable job).

Vesting — almost always essential. Industry standard:
(1) 4-year vesting total;
(2) 1-year cliff — no shares vest in the first year. A founder leaving before year 1 walks away with nothing;
(3) Monthly vesting thereafter (1/48th per month);
(4) Reverse vesting structure — founder receives all shares upfront, but the company has a buyback right over unvested shares at par value (good leaver) or nominal value (bad leaver).

Acceleration triggers: consider 'single-trigger' (acceleration on a change of control) or 'double-trigger' (acceleration on change of control + termination without cause) for senior founders.

IP Assignment — the most important clause for any tech or product startup. All code, designs, patents, trademarks and copyrights created by founders or employees must vest unambiguously in the company. Reference:
(1) Section 17 of the Copyright Act, 1957;
(2) Assignment provisions of the Patents Act, 1970;
(3) Section 39 of the Trade Marks Act, 1999.

Without explicit assignment, the founder personally retains the IP — which can derail funding rounds or future M&A.

Confidentiality — survives termination; covers trade secrets, customer lists, financial information, technology.

Non-compete during employment — fully enforceable.

Non-compete after employment — generally unenforceable under Section 27 of the Indian Contract Act as restraint of trade. Use non-solicitation instead (of customers and employees, for 1-2 years) which IS enforceable if reasonable in scope and duration.

Reserved / Veto Matters — decisions that require unanimous founder approval (or supermajority):
(1) Issuance of new shares or change in cap table;
(2) M&A, sale of substantial assets;
(3) Related-party transactions above a threshold;
(4) Indebtedness above a threshold;
(5) Hiring or firing of C-suite;
(6) Change in primary business;
(7) Adoption of ESOP and grants above a threshold;
(8) Annual budget approval.

Transfer Restrictions — to prevent unwanted shareholders:
(1) Right of First Refusal (ROFR) — if a founder wants to sell shares, they must first offer them to other founders/company at the same price;
(2) Tag-Along — if a majority founder sells, minority founders can sell at the same terms;
(3) Drag-Along — if majority founders agree to a sale, minority is obliged to sell on the same terms (subject to a minimum price);
(4) Lock-up period — no transfers for 1-3 years (typically lifted on funding or exit).

Disputes will happen — plan for them.

Dispute resolution clause: arbitration seated in India under the Arbitration and Conciliation Act, 1996 — faster and more confidential than court. Specify the seat (Mumbai, Bangalore, Delhi), language (English), and arbitrator-appointment mechanism (e.g., sole arbitrator agreed jointly, or one nominee each + presiding).

Exit and Buy-Sell Clause: spell out what happens on:
(1) Resignation — buyback at vesting-adjusted value;
(2) Termination for cause (fraud, conviction, breach) — bad-leaver buyback at par value;
(3) Termination without cause — good-leaver buyback at fair market value;
(4) Death or disability — buyback by company; specify life-insurance funding;
(5) Deadlock — shotgun clause (one founder names a price; the other either buys at that price or sells at that price), Russian roulette, Texas shoot-out.

See our companion guide on Startup India registration.