At a glance
| What it is | Governing law | Filed with | Government fee | When it changes |
|---|---|---|---|---|
| A contract between the founders | Indian Contract Act, 1872 | Nobody. It is not filed or registered | None | When an investor comes in, a shareholders agreement takes over the investor-facing terms |
What a founders agreement is, and what it is not
It is a contract between the founders, made and enforced under the Indian Contract Act, 1872 like any other contract: competent parties, free consent, lawful consideration and a lawful object. There is no statutory form, no filing and no government fee.
What it is not:
- It is not the articles of association. The articles are the company's constitution and bind the company and its members. A founders agreement binds the founders who sign it. Anything you want the company itself to be obliged to do belongs in the articles as well: see change to MoA and AoA.
- It is not a shareholders agreement. A shareholders agreement is what gets signed when an investor puts money in, and it carries the investor's clause set. See shareholders agreement.
- It is not an employment contract. Founders who draw a salary also need appointment terms: see appointment letter.
- It is not a substitute for the cap table. The agreement says what the split is; the register of members and the share certificates are what prove it.
The useful way to think about it: the founders agreement is the document you write while you still trust each other, so that you do not have to negotiate while you do not.
The equity split, and the questions that actually decide it
Most founder disputes we see are not about the number. They are about what the number was supposed to reward.
Get these answered in writing before the split is fixed:
- What is each founder actually committing? Full time from day one, or evenings until the salary works? A part-time founder on an equal split is the most common source of a later fight.
- What has already been contributed? Money, code written before incorporation, a customer list, a registered brand, equipment. Contributions made before the company existed need to come into it: see the IP section below.
- Who is putting in cash, and is it equity or a loan? Say which. A founder who "put in" ₹15,00,000 and never documented whether it was share capital or a loan has neither a clean claim nor a clean deduction.
- Who carries the personal guarantees? Bank facilities, lease deposits and vendor credit often sit on one founder's name.
- What happens to the split when a fourth person joins as a founder? Say now whether they come from the pool or from a fresh issue, and who dilutes.
Two drafting rules are worth more than any split formula. First, an equal split is a decision, not a default, so write the reason. Second, never leave the split conditional on something undefined like "depending on contribution", because that sentence is the dispute.
Reverse vesting: how it really works in an Indian private company
Vesting means a founder earns their shares over time by staying and delivering. Reverse vesting is the version used at incorporation: the shares are issued to the founder at the start, and the company or the other founders have the right to take back the unvested portion if the founder leaves early.
The mechanism matters, because a company cannot simply cancel shares it has already allotted. In an Indian private company, reverse vesting is built as a contractual obligation to transfer:
| Element | How it is drafted |
|---|---|
| The trigger | The founder ceasing to be engaged with the company, before the vesting schedule completes |
| The obligation | The leaving founder must transfer the unvested shares to the continuing founders, to a nominee, or to a person the board names |
| The price | Fixed in the agreement, usually the nominal or issue price for unvested shares, with a different basis for vested shares if they are being bought at all |
| The machinery | Transfer on Form SH-4, delivered to the company within 60 days of execution under section 56(1) of the Companies Act, 2013, with stamp duty on the transfer at 0.015% of the consideration since 1 July 2020. See share transfer |
| The backstop | A power of attorney or an irrevocable undertaking, so the transfer can be completed if the leaver refuses to sign |
| The articles | In a private company the articles restrict the transfer of shares, so the restriction and the pre-emption route should be reflected there too |
A buy-back by the company is the other route, and it is not the simple one: a company purchasing its own shares has to meet the conditions the Companies Act, 2013 lays down for a buy-back, which is a resolution-and-limits exercise, not a signature. For founder vesting, the transfer route is what gets used.
The cliff, and what vests when
A cliff is a period at the start during which nothing vests. Leave before it and you leave with nothing. After the cliff, a tranche vests and the rest accrues over the remaining schedule, monthly, quarterly or annually.
Three points the drafting has to settle, because the schedule alone does not:
- What counts as leaving. Resignation, removal for cause, removal without cause, death, permanent incapacity and a founder who simply stops turning up are five different events and should not share one clause.
- Acceleration. Whether vesting accelerates on a sale of the company, in full or in part. An investor will look at this closely, and so will an acquirer.
- Credit for time before incorporation. If two people worked on this for a year before the company existed, say whether that counts towards the schedule.
We do not publish market-standard vesting periods, because we have no dataset to stand behind. What we do is set the schedule against your actual plan: how long until the product is real, how long until revenue, and how long each founder is realistically committing.
The demat rule that catches founders out
If your company is not a small company, its shares must be issued and held in dematerialised form under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, and a holder has to dematerialise before transferring.
A small company is one with paid-up capital up to ₹10 crore and turnover up to ₹100 crore, per the threshold notified with effect from 1 December 2025. A holding company or a subsidiary cannot be a small company, whatever its size.
The practical consequence for a founders agreement: if the company is outside the small-company definition, a vesting transfer cannot be completed with a physical SH-4 and a share certificate. The leaver's holding has to be in demat form first, and that takes time you will not have during a fallout. Build the demat position into the agreement rather than discovering it on the day: see dematerialisation of shares.
When a founder leaves: good leaver and bad leaver
This is the clause that earns the fee. It decides what a departing founder keeps.
| Good leaver | Bad leaver | |
|---|---|---|
| Typical triggers | Death, permanent incapacity, removal without cause, an agreed exit | Resignation before the cliff, removal for cause, material breach, fraud, competing activity, breach of confidentiality |
| Vested shares | Usually kept, or bought at a fair basis stated in the agreement | Often bought at a stated discount to fair value, or at the issue price |
| Unvested shares | Lapse or transfer at the nominal or issue price | Same, and on the harsher price basis |
| Board seat and role | Resigns on exit | Resigns on exit |
| Continuing obligations | Confidentiality, IP assignment, non-solicit, non-disparagement | The same, and they are the obligations that will actually be enforced |
Four things to fix in the drafting:
- Define "cause" tightly and exhaustively. A vague cause clause is how a good leaver is treated as a bad one, and it is the fact pattern that ends up in litigation.
- Say who decides. If the remaining founders decide whether a departure is for cause, the clause is one-sided. Name an objective process.
- Deal with the board seat and the director position. Resignation from the shareholding is not resignation from the board: the ROC position has to be filed separately. See director removal.
- Deal with the salary, the loan account and the guarantees in the same document as the shares, or they will be litigated separately.
Roles, decisions and deadlock
Equal shareholdings with no decision mechanism is the commonest structural fault in a two-founder company. If both founders hold 50%, neither can pass a resolution without the other, and the company stops.
What the agreement should set out:
- Titles and actual scope. Who owns product, sales, finance and hiring. Write the boundaries, not the designations.
- Founder decisions. A short list of matters that need all founders to agree: issuing shares, taking debt, selling assets, changing the business, hiring above a level, spending above a limit, related party transactions.
- Everything else. Decided by the person whose area it is, so the company can move.
- A deadlock route. Escalation to a named advisor or mediator first, then a mechanism. Any buy-out mechanism has to be drafted to work under a private company's transfer restrictions, not copied from a foreign template.
- Time commitment and outside activity. What each founder may do on the side, and what needs consent.
IP assignment: the clause that gets read in due diligence
Assume every serious investor and acquirer will test one thing: does the company own what it sells?
- Work done before incorporation belongs to the person who did it, not to the company that did not yet exist. It comes in only by a written assignment.
- A freelancer or agency keeps copyright in commissioned work until there is a written assignment. The most common gap we find is the logo designed by an outside designer and never assigned.
- An employer is generally the first owner of work made by an employee in the course of employment, absent an agreement to the contrary, so get the employment contracts to say so in terms.
- Copyright assignments need care. Under section 19(5) of the Copyright Act, 1957, an assignment that does not state the period is taken to be for five years, and under section 19(6), where no territory is stated, it is presumed to extend within India. A one-line "all rights assigned" note may transfer far less than both sides assumed.
- Registrations should be in the company's name, not a founder's. If the brand or the code was registered personally, move it: see trademark assignment and copyright registration.
The founders agreement should carry a present assignment of everything relating to the business, a covenant to assign future work, and an obligation to sign whatever is needed to record it. Then do the recording.
What the agreement cannot do: section 27 and the founder non-compete
Every founders agreement we are asked to draft comes with a request for a non-compete. It has to be explained rather than promised.
Section 27 of the Indian Contract Act, 1872 makes an agreement that restrains anyone from carrying on a lawful profession, trade or business void to that extent. Indian courts generally do not enforce a non-compete after the relationship has ended, and narrowing the duration or the geography usually does not save it. Courts have put a person's right to earn a living ahead of the other side's commercial interest.
What does hold up:
- Restraints while the founder is still in. Exclusivity and non-compete obligations during the engagement are generally upheld unless they are excessively harsh or one-sided.
- Confidentiality after exit. Post-termination confidentiality obligations are generally enforceable, and courts have treated maintaining confidence as being in the public interest.
- Non-solicit. A post-termination non-solicit has not been declared unenforceable in the way non-compete has, and a three-year non-solicitation restriction has been upheld by a High Court. Proving that someone was actively solicited, rather than that they left on their own, is the practical difficulty.
- The economics. This is the real answer. What actually holds a founder is unvested equity and a bad-leaver price. Vesting does the work a non-compete cannot.
So we draft the non-compete for the period of the engagement, the confidentiality and non-solicit to survive it, and we put the retention into the vesting schedule. See non-disclosure agreement for how the confidentiality side is built.
How it sits with the articles, the ESOP pool and a later shareholders agreement
| Document | What it does | When |
|---|---|---|
| Founders agreement | Binds the founders to each other on split, vesting, roles, IP and exits | Before or at incorporation, and it should be signed before the shares are allotted |
| Articles of association | The company's constitution. Transfer restrictions, pre-emption and anything the company itself must act on belong here | Amended under section 14 by special resolution, with the resolution filed in MGT-14 within 30 days under section 117 |
| ESOP scheme | The employee pool, approved by the members and documented separately | When you start hiring on equity: see ESOP scheme drafting |
| Shareholders agreement | The investor's clause set: board seats, reserved matters, anti-dilution, pre-emption, transfer restrictions, drag and tag, exit | At the funding round: see shareholders agreement |
A founders agreement is not thrown away when an investor arrives. The vesting, the leaver treatment and the IP covenants usually survive and get carried into, or expressly preserved alongside, the shareholders agreement. What changes is that the investor's rights sit on top, and the articles have to be amended to match.
That is also why the founders agreement should be drafted so it can be read next to an investment document later. A home-made agreement with a 50-50 deadlock, no vesting and no IP assignment is a due diligence finding, and it gets fixed at the worst possible moment: while a term sheet is live. See term sheet review.
Fees
| Item | Amount |
|---|---|
| Regikart professional fee, drafting a founders agreement | Fee on quote after a free review |
| Our confirmed contract drafting fee, for comparison | Contract drafting and review starts at ₹1,999: see legal contract drafting |
| Review and markup of a founders agreement someone has sent you | Quoted in writing after we see the document |
| Government fee to draft or sign a founders agreement | No government fee |
| Stamp duty | A state levy under the relevant State Stamp Act. It depends on the state and the type of document, and we confirm the position before execution |
| Notarisation, if you want it | Notary's charge at actuals |
| Related filings, if the structure changes | ROC fees at actuals, for example MGT-14 on an articles amendment, or SH-4 stamp duty on a vesting transfer |
Professional fees exclude GST at 18%. Government fees, where they apply, are paid at actuals to the department and are shown separately. Fees verified on 27 September 2026.
How we do it
| Step | What happens | Who does it |
|---|---|---|
| 1. Free review | You tell us who the founders are, the split, what each is committing, what has already been built and whether the company exists yet | Regikart |
| 2. Structure note | We set out the vesting mechanics that will work in your company, the leaver treatment, the IP gaps to close and anything that must go into the articles, and quote in writing | Regikart |
| 3. Drafting | The advocate drafts the founders agreement to those facts | Advocate |
| 4. One round of changes | Each founder reads it and comes back. The advocate issues the revised draft | Advocate |
| 5. Signing | All founders sign. An agreement of this kind can be signed electronically, because it is not on the excluded list in the First Schedule to the Information Technology Act, 2000 | You, with our guidance |
| 6. Follow-through | The company-law side: the articles amendment, the register of members, the IP assignments recorded, and the ROC filings that go with them | Regikart |
Step 6 is the part most founders agreements never get. A vesting clause that was never reflected in the articles, and an IP assignment that was never recorded against the registration, are clauses that fail when they are finally needed.
What we need from you
- Who the founders are, with the agreed split and whether the company is already incorporated.
- What each founder is committing: full time or part time, from when, and for what compensation.
- What has already gone in: money, code, designs, a brand, a customer list, equipment, with who paid and who made it.
- Whether any registration is in a personal name: trademark, domain, copyright, app store account, bank mandate.
- Any outside commitments: employment elsewhere, another company, a notice period, an existing non-compete.
- Whether a funding conversation is live, because that changes the sequence and what the agreement has to anticipate.
Mistakes we see in founder documents
- An equal split with no vesting. A founder can leave in month four with a quarter of the company and no obligation to do anything for it.
- A 50-50 company with no deadlock clause. Neither founder can pass a resolution and the company cannot act.
- No IP assignment for pre-incorporation work. The code, designs and brand still belong to the people who made them.
- Registrations left in a personal name. The trademark, the domain and the app store account are the three that get missed.
- A non-compete relied on as the retention mechanism. Section 27 makes a post-exit restraint void to that extent. Use vesting.
- A cause definition that is not a definition. "Conduct prejudicial to the company" decided by the other founders is a clause that will be fought over.
- The agreement never reflected in the articles. The company is not a party to your contract and cannot be obliged by it alone.
- Never signed. A shared document with tracked changes and no signatures is not an agreement. Date it and sign it.
Why founders use Regikart
Regikart is a CA and CS firm with 250+ clients. A founders agreement is drafted and issued by an advocate we work with. Regikart works out the company-law mechanics, the cap table arithmetic and the IP position, and does the filings that make the document real.
- We draft it to be enforceable in your actual company. Vesting only works if the transfer machinery, the articles and the demat position line up. That is company-law work, and it is what most templates skip.
- The IP position is closed, not mentioned. Assignments drafted, and registrations moved into the company's name.
- We say what will not hold. A founder non-compete after exit is the clearest example, and the page says so before you pay for it.
- One team for the whole stack: incorporation, the founders agreement, the ESOP pool, DPIIT recognition through startup india registration and the investor documents when the round comes.
- Offices in Kolkata (Head Office), Delhi and Bengaluru, with clients across India served online. Call or WhatsApp +91 70444 94804, or email [email protected].
Related: shareholders agreement · ESOP scheme drafting · private limited company registration · term sheet review · legal contract drafting · non-disclosure agreement