Key Terms to Include in a Founders’ Agreement

When two or more people decide to build a company together, they usually begin with enthusiasm, trust, and a shared vision. The early conversations are about ideas, products, and funding. Rarely do the founders pause to ask the more difficult questions: What happens if one of us leaves? Who owns the code we’ve written? How will decisions be made when we disagree?

This is where a Founders’ Agreement becomes invaluable. Think of it as the “constitution” of your startup, a document that captures the spirit of your collaboration, while putting in place legal guard rails that protect both the founders and the business.

In India, where startup stories are often built on long friendships and informal understandings, a well-drafted founders’ agreement ensures that relationships and the company both survive the turbulence of growth.

Why a Founders’ Agreement Matters

Disputes among founders are one of the leading reasons why young companies collapse before they even reach their first funding round. A handshake deal may work in the first month, but as soon as salaries, investors, or client revenues enter the picture, uncertainty breeds mistrust. An agreement forces clarity on questions that are uncomfortable today but inevitable tomorrow.

It signals to investors that the company is serious, disciplined, and structured. More importantly, it preserves friendships and professional respect by making expectations explicit.

The Essentials Every Founders’ Agreement Should Cover

1. Roles and Responsibilities

   At the start, everyone does everything. But over time, roles need to be defined. A good agreement records who is the CEO, who leads technology, who manages finance, and what each founder is committing to in terms of time. It also draws boundaries on side-projects and conflicts of interest.

2. Capital and Contributions

   Founders often bring in different kinds of value, one may contribute cash, another brings technical expertise, another offers market connections. The agreement should list these contributions clearly, whether it is money, intellectual property, or even domain names.

3. Equity and Vesting

   Equity splits are usually the most sensitive conversations. Should it be equal? Should it reflect who contributes more time or capital? Whatever the decision, vesting ensures fairness over time. The common structure in India is a four-year vesting schedule with a one-year “cliff” meaning if a founder exits before one year, they walk away with nothing, but after that their shares vest gradually. This prevents someone from leaving early while still holding a large stake in the company’s future.

   
   

4. Intellectual Property Ownership

   In the world of technology and innovation, intellectual property is the real asset. The agreement must make it unambiguous that all code, inventions, logos, content, and designs created for the business belong to the company, not to individual founders. This avoids messy disputes later about who “really” owns the idea.

   
   

5. Confidentiality and Non-Solicit

   Indian law does not easily enforce non-compete clauses after a founder leaves, but confidentiality and non-solicitation provisions are powerful tools. They ensure that sensitive data remains protected and that departing founders cannot immediately poach employees or clients.

6. Decision-Making and Deadlocks

   Not all decisions require everyone’s consent. The agreement should distinguish between day-to-day operational decisions (which can be left to the CEO or relevant lead) and “reserved matters” that require the approval of all or most founders. Reserved matters often include raising fresh capital, issuing new shares, or selling core intellectual property. In case of deadlock, the agreement should set out a process, whether it is mediation, a cooling-off period, or a structured buyout mechanism.

7. Exit and Buyback Rules

   What happens if a founder leaves, voluntarily or otherwise? The good leaver/bad leaver concept provides answers. A “good leaver” may exit for health or family reasons and is allowed to retain or sell their vested shares at fair value. A “bad leaver,” such as someone who commits fraud or breaches confidentiality, may be forced to sell even their vested shares back to the company at a discount. Having these rules written down avoids bitter arguments when emotions are high.

8. Dispute Resolution

   Even with the best planning, disputes may arise. In India, founders’ agreements typically provide for arbitration, with the seat of arbitration in a city where the company operates. This ensures faster and more private resolution than lengthy court battles.

The Indian Context

While many of these terms mirror global practice, the Indian legal system adds its own colour. For instance:

• Non-competes after employment are generally unenforceable under Section 27 of the Indian Contract Act. Confidentiality and non-solicitation are better tools.

• Stamp duty is payable on founders’ agreements and related share transfers — an often-overlooked detail that can make documents inadmissible in court if skipped.

• The Data Protection Act, 2023 and sectoral regulations (for fintech, healthtech, edtech) mean that founders must also align early on compliance responsibilities.

These nuances make it important to draft the agreement with Indian realities in mind, not just copy a foreign template.

More Than Just a Document

A founders’ agreement is not merely about anticipating worst-case scenarios. Done well, it creates alignment, trust, and confidence. It allows the founders to focus on building the business without second-guessing each other’s intentions.

Think of it as your startup’s first serious piece of governance. Long before you onboard investors, hire a CFO, or expand abroad, this document gives you clarity. It is the invisible infrastructure on which everything else rests.

Final Thoughts

The story of every startup begins with people, not products. A founders’ agreement ensures those people remain on the same page even when circumstances change. It’s a shield for the company, a safeguard for the founders, and a reassurance for future investors.