Founders Agreement India: What Should Co-Founders Decide?

Two founders may agree perfectly on what they want to build and still have very different ideas about what happens next.

One expects both founders to work full-time. The other plans to keep consulting on the side.

One thinks a 50:50 equity split means equal control over every decision. The other assumes the CEO gets the final call.

One believes that if a founder leaves after six months, the company gets their shares back. The documents may say nothing of the sort.

These are not problems a founders’ agreement can eliminate. They are decisions it can force the founders to make before the answers become expensive to negotiate.

For an Indian startup, a useful founders’ agreement should therefore do more than record an equity split. It should answer what each founder contributes, who controls which decisions, what happens if somebody stops contributing or leaves, who owns the intellectual property, and how a deadlock is resolved.

There is another important point: a founders’ agreement does not operate in isolation.

Where the business is incorporated as a company, some arrangements may also need to be reflected or implemented through the articles of association, share issuances or transfers, board/shareholder actions, employment or service arrangements, IP assignments and statutory records.

Here are the questions founders should settle.

1. Who owns how much — and why?

“Let’s split it equally” is easy to agree when the company owns very little.

The harder question is whether that split still makes sense if the founders later contribute very differently.

Before fixing ownership, founders should discuss what each person is bringing to the venture:

• time and operational responsibility;

• cash;

• technology or intellectual property;

• existing customers or distribution;

• industry relationships;

• assets;

• prior work on the product; and

• future commitments.

The objective is not to find a mathematically perfect equity split. There may be none.

The objective is to understand what assumptions the split is based on.

If one founder receives 50% because both founders are expected to work full-time for four years, the documents should not ignore what happens if that founder stops working after four months.

That leads directly to vesting and exit.

2. Is the equity earned immediately, or over time?

Founders often discuss ownership as though receiving shares and permanently earning the economic benefit of those shares are the same thing.

They need not be.

A founder-vesting arrangement can make some or all of a founder's equity economically contingent on continued involvement over an agreed period. Depending on the structure, this may be implemented through contractual transfer, repurchase, call-option or other mechanisms, each of which needs to be checked against applicable company, tax, foreign-exchange and other legal requirements.

The commercial questions come first:

• How long must a founder remain involved?

• Is there a cliff before any portion is treated as vested?

• What happens if the founder resigns?

• What if the company removes the founder?

• What if departure follows serious misconduct?

• What happens on death or incapacity?

• Does an acquisition accelerate vesting?

Simply writing “four-year vesting” does not answer those questions.

The real decision is: how much ownership should a founder retain if their expected contribution stops earlier than planned?

3. What exactly is each founder expected to contribute?

Job titles are rarely enough.

“CEO” and “CTO” tell you very little about the actual commitments between founders.

A founders’ agreement or associated service arrangements can clarify:

• each founder's role;

• whether involvement is full-time;

• expected responsibilities;

• whether outside employment or businesses are permitted;

• expected capital contributions;

• compensation;

• expense approval;

• reporting responsibilities; and

• circumstances in which roles may change.

Avoid turning the agreement into an impossible daily task list. A startup's responsibilities will change.

But the agreement should make the fundamental bargain clear.

If one founder is expected to contribute money while another contributes full-time execution, that distinction should not exist only in conversation.

4. Who decides what?

Ownership and management are not the same thing.

A founder may be a shareholder, director, employee and officer of the company at the same time. Each capacity carries a different legal and commercial function.

Founders should decide which matters can be handled in the ordinary course by the person responsible for that function and which decisions require approval from the other founders, the board or shareholders.

Reserved decisions might include matters such as:

• issuing new shares;

• raising substantial debt;

• changing the nature of the business;

• selling important intellectual property;

• approving unusually large expenditure;

• entering related-party transactions;

• appointing or removing senior leadership;

• acquiring or selling a business; or

• shutting the company down.

The list should fit the company.

Too little control can allow one founder to make decisions that fundamentally change the venture.

Too much control can make every operational decision dependent on unanimous consent.

Good governance distinguishes ordinary management from decisions that change the bargain between the founders.

5. What happens if the founders cannot agree?

This question becomes especially important in a 50:50 company.

If two equal founders must approve a reserved decision and they disagree, neither side necessarily has the votes to move forward.

The founders should therefore decide what counts as a deadlock and what happens after one occurs.

Possible mechanisms may include:

1. a defined period for good-faith negotiation;

2. escalation to an agreed adviser, board member or other decision-maker where appropriate;

3. mediation;

4. a structured buyout mechanism; or

5. ultimately, an agreed exit process.

The mechanism must fit the business. A provision that automatically forces one founder to buy the other may be commercially unrealistic if neither has the money to do so.

The important point is to design the process while both founders still expect never to use it.

6. What happens when a founder wants to leave?

A founder leaving creates at least two separate questions:

What happens to the person's operational role?

and

What happens to the person's shares?

They are not necessarily the same.

For example, resigning as a director does not itself mean surrendering shares. Section 168 of the Companies Act, 2013 separately regulates resignation from the office of director.

The founder documents should therefore address matters such as:

• resignation from employment or management;

• resignation from the board;

• vested and unvested equity;

• rights to purchase the departing founder's shares;

• valuation;

• payment mechanics;

• confidentiality;

• return of company information and property;

• intellectual-property obligations; and

• transition of access, customers and responsibilities.

A founder's departure should not require the remaining founders to invent an exit mechanism after the relationship has already deteriorated.

7. Can a founder sell their shares to somebody else?

Founders should understand the difference between owning shares and having an unrestricted ability to sell them.

For a private company, transfer restrictions form part of its corporate architecture: the Companies Act defines a private company by reference, among other things, to restrictions in its articles on the right to transfer shares. Section 58 also deals with refusal to register transfers and related rights.

Founder arrangements may additionally deal with mechanisms such as:

• rights of first refusal;

• rights of first offer;

• permitted transfers;

• lock-ins;

• tag-along rights; and

• drag-along rights.

The exact mechanism matters.

For example, a right of first refusal may give the other founders an opportunity to match a third-party offer. A tag-along right may protect a minority shareholder when another shareholder sells. A drag-along mechanism may facilitate a sale by requiring specified shareholders to participate if agreed conditions are satisfied.

But contractual wording alone should not be assumed to complete every corporate step required for the intended transfer arrangement.

Where a company is involved, the founders’ agreement, articles and corporate implementation should be designed together.

8. Who owns the idea, code, brand and other IP?

This question becomes more difficult when work started before the company existed.

A founder may have created:

• source code;

• designs;

• written content;

• product specifications;

• algorithms;

• domain names;

• trademarks or brand assets;

• databases; or

• proprietary processes.

Incorporating a company does not automatically answer who owns everything created beforehand.

Founders should identify:

1. what each founder created before incorporation;

2. what belongs personally to that founder;

3. what is being transferred or licensed to the company; and

4. who will own new IP created for the business.

For copyright, the formalities are particularly important. Section 19 of the Copyright Act, 1957 requires an assignment to be in writing and signed by the assignor or an authorised agent. The assignment must also identify the work and specify the rights assigned, duration and territorial extent, among other statutory requirements.

So “everything belongs to the startup” should not remain an informal understanding.

If the company depends on an asset, the company should be able to establish its rights in that asset.

9. Can founders build something else on the side?

Founders should discuss outside activities before one founder discovers the other's second business through LinkedIn.

Relevant questions include:

• Can founders take consulting assignments?

• Can they invest in other businesses?

• Can they run unrelated ventures?

• Can they work on side projects?

• What happens if a side project begins competing with the company?

• Can company employees, customers or confidential information be used?

Restrictions must be drafted carefully under Indian law.

Section 27 of the Indian Contract Act, 1872 provides that an agreement restraining a person from exercising a lawful profession, trade or business is void to that extent, subject to its statutory exception concerning sale of goodwill.

That means a broad post-exit statement such as “the founder shall never compete with the company” should not simply be assumed enforceable because it appears in a signed agreement.

The better drafting question is not how broad a restriction can be written. It is what legitimate business interest actually needs protection and what Indian law permits in that context.

10. What information must remain confidential?

Founders usually have access to the company's most sensitive information long before formal teams and access controls exist.

The agreement should consider:

• what information is confidential;

• permitted use;

• disclosure to employees, advisers or contractors;

• treatment of third-party confidential information;

• security obligations;

• return or deletion of material; and

• what survives after a founder leaves.

Confidentiality also needs operational support.

If every founder uses personal email, personal cloud storage and uncontrolled messaging accounts for company information, contractual confidentiality alone will not solve the underlying governance problem.

11. Will founders receive salaries, expenses or other payments?

Equity does not answer compensation.

Founders should decide when salaries begin, who approves changes and how business expenses are handled.

They should also distinguish:

• salary or remuneration;

• reimbursement of expenses;

• loans to or from founders;

• capital contributions;

• dividends; and

• other payments.

These categories can have different corporate, contractual and tax consequences.

A startup may legitimately decide that nobody takes salary initially. The important point is that expectations are aligned.

“Once we raise money, we'll figure it out” is not a compensation policy.

12. What happens when new investors arrive?

A founders’ agreement is not necessarily the company's final governance document.

An investment round can introduce a shareholders’ agreement containing new provisions on:

• board composition;

• investor consent matters;

• founder vesting;

• transfer restrictions;

• information rights;

• anti-dilution protection;

• liquidation preference;

• founder obligations; and

• exit rights.

The founders should therefore consider how their existing agreement interacts with future financing documents and whether specified provisions will terminate, continue or be replaced.

Otherwise, the company can end up with multiple documents attempting to regulate the same issue differently.

13. How will disputes actually be resolved?

“We'll sort it out between ourselves” works until the dispute is about whether the founders can sort it out themselves.

The agreement should specify the dispute-resolution process.

Depending on the circumstances, this may include negotiation, mediation, arbitration or litigation.

If arbitration is chosen, Section 7 of the Arbitration and Conciliation Act, 1996 requires an arbitration agreement to be in writing. The clause should be drafted carefully enough to establish what disputes are covered and how the agreed process operates.

For founders, however, dispute resolution is the final safety net.

The more important work happens earlier: defining ownership, authority, contribution and exit clearly enough that fewer disagreements need to reach that stage.

A founders’ agreement is only one part of the structure

A common mistake is to sign a detailed founders’ agreement and assume the job is finished.

For an incorporated company, implementation may also require the founders to consider whether the arrangement is properly reflected through:

• the articles of association;

• share subscription, issuance or transfer documents;

• the company's register and statutory filings;

• board and shareholder resolutions;

• founder employment or service agreements;

• intellectual-property assignments or licences; and

• later shareholders’ or investment agreements.

This distinction matters because the founders are making arrangements with each other inside a separate legal entity with its own statutory governance framework.

The agreement and the corporate records should therefore tell the same story.

The simplest founder-agreement test

Before signing, each founder should be able to answer seven questions independently:

Ownership: What do I own, and what must happen for me to keep it?

Contribution: What am I actually expected to contribute?

Control: Which decisions can I make, and which require somebody else's approval?

IP: What belongs to me and what belongs to the company?

Exit: What happens to my role and shares if I leave?

Deadlock: What happens if we fundamentally disagree?

Future funding: What can change when investors come in?

If the founders give materially different answers, the problem is not that the agreement needs more pages.

It is that the founders have not yet made the same deal.

A useful founders’ agreement records that deal while everyone still expects the relationship to work.

This article provides general legal information and does not constitute legal advice. The appropriate founder, shareholder and corporate arrangements depend on the entity structure, cap table, transaction, applicable law and specific facts.