How to Review a Founders Agreement in India

A founders agreement is the contract co-founders sign with each other, usually before or right around incorporation, to settle who owns what, who decides what, and what happens if one of them leaves. It is not the same document as the company's Memorandum and Articles, and it is not the Shareholders Agreement (SHA) investors will ask for later. The one thing most first-time founders get wrong: they skip it because "we trust each other", then discover trust was never the problem, an undocumented 50-50 split with no vesting and no IP assignment is. This guide (published by Adira, which makes contract review and CLM software, a commercial interest in you getting this right, but written to stand on its own) walks through every clause that matters, the Indian statutes and case law behind them, a red-flags table, and a checklist you can run before you sign.

What a founders agreement actually covers, and what it does not

A founders agreement is a private contract between the individuals who start a company. It typically covers equity split, vesting, roles, IP assignment, confidentiality, non-compete, deadlock, and what happens if someone leaves. Signed before incorporation, it binds only the people who sign it, as an ordinary contract under the Indian Contract Act, 1872, not the company, which does not exist yet.

That gap matters. Once the company is incorporated, the terms founders agreed to privately need to be carried into the documents that actually bind the company: the Articles of Association (AoA), and later the Shareholders Agreement once investors are in the cap table. A founders agreement that never gets embedded anywhere else is a promise between friends, enforceable in theory, but not the thing that decides a share transfer or a board vote later. Treat it as the first draft of terms that need a second home, not the final word.

Equity split and vesting: the term that decides everything later

Splitting equity feels like the founders agreement's main job, and it is often the part people rush. A clean, documented split, in percentages, not "we'll figure it out", avoids the single most common founder dispute: two people who both believe they own more than the cap table says.

But the split alone is not the protection. Vesting is. Under a standard reverse vesting clause, a founder's shares vest over time, commonly four years with a one-year cliff, so someone who leaves after three months does not walk away with the same stake as someone who builds the company for five years. No statute forces founders to accept vesting on their own shares; it is a negotiated protection investors will demand before funding, and one co-founders should agree between themselves earlier, before any investor is in the room. Vesting mechanics, cliffs, leaver definitions, acceleration triggers, and how this differs from statutory ESOP vesting under Section 62(1)(b) of the Companies Act, 2013 are dense enough to need their own space; see the full breakdown in founder vesting clauses explained. Do not split equity without also fixing a vesting schedule in the same document.

Roles, decision-making, and who signs what

A founders agreement should name, in writing, who holds which title, who has final say on product, hiring, and spending within stated limits, and which decisions need unanimous consent rather than a simple majority: a funding round, debt above a stated amount, hiring or firing a co-founder, and any change to the equity split are the common ones. Leaving this to "we'll discuss it" works until the first real disagreement, at which point an unwritten understanding is worth nothing.

IP assignment: why founders must assign to the company, and when

This is the clause most founding teams get wrong, not because they disagree about it, but because they never think about it. Before incorporation, any code, design, or brand name a founder builds belongs to that individual personally. A company cannot own IP before it legally exists, and does not automatically inherit what its founders built earlier just because they became its shareholders and employees.

Two mechanics apply, and founders regularly confuse them. Section 15(h) of the Specific Relief Act, 1963 deals with contracts, not IP ownership: it lets a company, once incorporated, step into a contract its promoters signed on its behalf before incorporation, "when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation... [provided] the company has accepted the contract and has communicated such acceptance to the other party to the contract." Read the full section on Indian Kanoon. Useful for pre-incorporation vendor contracts, this does not by itself transfer ownership of IP a founder personally created.

Actual ownership has to move by a proper written assignment, and Indian IP statutes are strict about it. Section 19(1) of the Copyright Act, 1957 requires a copyright assignment to be in writing, signed by the assignor. Section 68 of the Patents Act, 1970 goes further: "An assignment of a patent or of a share in a patent... shall not be valid unless the same were in writing and the agreement between the parties concerned is reduced to the form of a document embodying all the terms and conditions governing their rights and obligations and duly executed." See the official text on the IP India portal. A verbal "obviously the company owns it" satisfies neither section.

In practice, every founder should sign a written IP assignment deed, dated at or shortly after incorporation, assigning everything they built for the venture to the company. Section 17's default rule, that an employer owns work made by an employee in the course of employment, is not a safe substitute, since founders in the earliest months are often not on formal employment terms with a company that barely exists. The full mechanics, including the Section 19(5) five-year default when a copyright assignment is silent on duration, are covered in IP assignment clauses explained. Get this signed before a funding round or due diligence asks for it, not renegotiated under deal pressure with a founder who now knows they have leverage.

Leaver provisions: good leaver, bad leaver, and what the company can claim back

A leaver clause defines what happens to a departing founder's shares, tied directly to the vesting schedule above. A good leaver, someone who leaves for reasons the agreement treats as acceptable, health, mutual agreement, being pushed out without cause, typically keeps whatever has already vested and forfeits the rest. A bad leaver, someone terminated for cause, fraud, or a serious breach including the non-compete or confidentiality clauses below, may forfeit unvested shares and be forced to sell back even vested shares, often at a discount to fair value or at par. Fix who values the buyback and the payment timeline; an open-ended "fair value to be determined" clause turns an exit into a second negotiation nobody wants.

Non-compete, non-solicit, and the Section 27 wall

Founders agreements often try to stop a departing co-founder from starting a competing business or poaching the team. In India, this runs straight into Section 27 of the Indian Contract Act, 1872, which states plainly:

"Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." Source: Section 27, Indian Contract Act, 1872 (Indian Kanoon)

The Supreme Court applied this directly to a post-service restraint in Superintendence Company of India (P) Ltd. v Krishan Murgai, 1980 AIR 1717, (1981) 2 SCC 246. A branch manager's contract barred him from working for a competitor, or starting a similar business, for two years after leaving. The Court held the restraint, taking effect after the working relationship ended, was void under Section 27; a restriction operating only during the relationship can be valid, one reaching beyond it generally is not. Read the judgment on Indian Kanoon. A clause barring a departed co-founder from ever competing, anywhere, is largely unenforceable on the same logic; courts have carved only a narrow exception where the restraint is genuinely tied to the sale of a business's goodwill, closer to an exiting founder cashing out than to an ordinary departure.

Non-solicit clauses, not poaching the remaining team or customers for a defined period, sit on firmer ground, since they restrain a specific act rather than the entire trade, but an over-broad, indefinite non-solicit invites the same Section 27 challenge. Keep both narrow: a stated time period, not "forever", and a defined scope, not "any business the company could conceivably enter."

Confidentiality: what actually protects it

Unlike non-compete, a confidentiality obligation does not restrain anyone's ability to work, so it does not run into Section 27 at all, and Indian courts enforce reasonably drafted confidentiality clauses as ordinary contract terms. There is also a narrow criminal backstop: Section 72A of the Information Technology Act, 2000 punishes disclosure of personal information secured under a lawful contract, "without the consent of the person concerned, or in breach of a lawful contract," with imprisonment up to three years, a fine up to five lakh rupees, or both. See Section 72A on Indian Kanoon. That covers personal information specifically, not every business fact, so the contractual clause itself still does most of the work. Mark up a confidentiality clause against a standard checklist free in Weave before it goes into your founders agreement.

Deadlock: what happens when co-founders cannot agree

A deadlock clause defines what happens when co-founders, especially in a common 50-50 split, hit a vote they cannot resolve. Without one, a genuine standoff over strategy, spending, or an exit has no default path and tends to end up frozen or in court. Common mechanisms: escalation to a named advisor within a fixed window, mandatory mediation, or a buy-sell (shotgun) clause where one founder names a price and the other must buy them out or sell at it. A 50-50 split without a deadlock mechanism is the riskiest equity structure a two-founder company can have; if you cannot avoid the even split, do not skip this clause.

What happens if a founder quits

Three things should already be answered by the clauses above: what equity they keep (vesting), whether the company can buy back vested shares and at what price (the leaver provision), and whether they can compete or poach immediately (Section 27's limits). If the agreement is silent or ambiguous, a departing founder who refuses to sell back stock, or a majority that tries to freeze out a minority founder, can end up in an oppression and mismanagement dispute. Section 241 of the Companies Act, 2013 lets a member apply to the National Company Law Tribunal where the company's affairs are conducted "in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member," and Section 242 gives the Tribunal wide powers, including ordering a share purchase, a slow, expensive fallback for a situation a well-drafted leaver clause should have avoided.

Red flags

Normal	Red flag	Why it matters
Fixed equity percentages with a vesting schedule in the same document	Split agreed "verbally", to formalise later	No document when memories of the deal diverge
Vesting with a 1-year cliff, 4-year schedule, tied to leaver definitions	No vesting on founder shares	A founder who leaves in month two keeps their full stake
Written IP assignment deed, signed by every founder, dated at incorporation	"The company obviously owns it" with no signed deed	Fails Section 19(1) Copyright Act and Section 68 Patents Act writing rules
Non-compete and non-solicit scoped to a stated time and defined activity	Indefinite, worldwide non-compete on a departing founder	Largely void under Section 27; false sense of protection
Deadlock mechanism named, with a time-bound trigger	No deadlock clause, especially on a 50-50 split	A real standoff ends up frozen or in court
Buyback price and timeline fixed by formula or independent valuer	"Fair value to be mutually agreed" on exit	Every departure becomes a fresh, unbalanced negotiation
Confidentiality covers the venture's information and anything brought from a prior job	Confidentiality limited to undefined "trade secrets"	Leaves customer lists, pricing, and pitch decks unprotected
Agreement states it will be carried into the AoA and later SHA	Treated as the permanent, only word on control	Articles or SHA that conflict later generally govern instead

Bad clause, better clause

Bad: "The Founders shall each own 50% of the Company and shall not compete with the Company's business at any time, in any location, whether during their involvement with the Company or after."

What is wrong: no vesting, no leaver mechanics, and an indefinite worldwide non-compete that Section 27 makes largely unenforceable the moment a founder actually leaves.

Better: "Each Founder's shares shall vest over 48 months from the Effective Date, with a 12-month cliff, in accordance with Schedule A. On a Bad Leaver Event (as defined in Schedule A), unvested shares shall be forfeited and vested shares may be repurchased by the Company at the lower of cost or fair market value, as determined under Schedule B. For 12 months following any Founder's departure, that Founder shall not solicit the Company's employees or customers for a competing business; this Clause does not restrain the Founder's right to be employed by, found, or work for any other lawful business."

What changed: vesting and leaver mechanics are specific and scheduled, the buyback price and process are defined instead of left open, and the restrictive covenant is narrowed to non-solicitation with a stated time limit rather than an open-ended non-compete that would not survive a challenge anyway.

How this interacts with other documents

A founders agreement does not stand alone. Its vesting terms need to line up with the founder vesting clause once an SHA is signed, and its IP assignment needs to match the deed described in IP assignment clauses explained. Once investors arrive, most substantive terms get restated inside the Shareholders Agreement, and any right meant to bind the company itself, not just the signing founders, needs a matching amendment to the Articles of Association.

US and global contrast

US founder agreements cover the same ground, split, four-year vesting with a one-year cliff, IP assignment, leaver provisions, and US courts are far more willing to enforce a reasonable non-compete against a founder than Indian courts are under Section 27. The bigger practical difference is IP: US assignment leans on "work made for hire" doctrine, shifting default ownership to the employer automatically; India's narrower employer default (Section 17) and strict writing requirement (Section 19(1)) make a signed deed, not an assumption about employment status, the safer route.

Founders agreement checklist

1. Is the equity split fixed percentages, not "to be finalised later"?
2. Does a vesting schedule (cliff, period, triggers) apply to every founder's shares?
3. Are good leaver and bad leaver defined, with a buyback price and payment timeline?
4. Has every founder signed a written IP assignment deed, not just a promise to assign later?
5. Are non-compete and non-solicit clauses time-bound and scoped, not indefinite and worldwide?
6. Is there a deadlock mechanism with a time-bound trigger, especially on a 50-50 split?
7. Are unanimous-consent decisions (funding, debt, hiring or firing a co-founder, split changes) listed specifically?
8. Does the agreement say its terms will be carried into the AoA and any future SHA?
9. Is the agreement signed and, where the state requires it, properly stamped?

FAQ

Is a founders agreement legally required in India? No. There is no statute requiring co-founders to sign one. Its absence just removes the document that would otherwise settle an equity, IP, or exit dispute before it becomes an expensive one.

What happens to a founder's equity if they leave before the vesting period ends? They keep whatever has already vested and forfeit the unvested balance, which the company or remaining founders typically have the right to buy back. Without a vesting clause, a founder who leaves on day one legally keeps their full original stake.

Do we still need a founders agreement if we already have a Shareholders Agreement? Founders usually sign their agreement before an SHA exists. Once an SHA is signed it typically restates the substantive terms, but the founders agreement remains evidence of what was originally agreed, and some internal terms, like role division, may never appear in the SHA at all.

Can a non-compete clause stop a co-founder from starting a new company after they leave? Rarely, if it is broad and indefinite. Section 27 of the Indian Contract Act, 1872 voids agreements restraining a lawful profession, trade, or business, and Superintendence Company of India v Krishan Murgai confirms this applies to restraints taking effect after the relationship ends. A narrow, time-bound non-solicit has a better chance of holding up.

Does our IP automatically belong to the company once we incorporate? No. IP a founder created before incorporation stays personally owned until formally assigned, in writing. Section 19(1) of the Copyright Act and Section 68 of the Patents Act both require a written, signed assignment; "the company owns everything" in the founders agreement is not a substitute for a signed deed.

What happens if two 50-50 founders cannot agree on a major decision? Whatever the deadlock clause says, if there is one, escalation to a named advisor, mediation, or a buy-sell option are common. Without one, a standoff has no contractual default and can escalate into an oppression and mismanagement dispute under Section 241 of the Companies Act, 2013, far slower than a clause that would have resolved it in weeks.

This guide gets you to a working understanding of what a founders agreement should cover under Indian law and the statutes that back each clause. It does not tell you whether your specific agreement, given your equity split, your state's stamp duty rules, and the facts of your founding team, will hold up if tested; that depends on the exact drafting and circumstances, and is not legal advice. Talk to a corporate lawyer before you sign, amend, or rely on a founders agreement in a live dispute or negotiation.