Founders' agreement
What Founders' agreement means, how it works, a worked example, the mistakes we see and the questions founders ask.
DefinitionA founders' agreement is the contract in which a startup's co-founders record the equity split, vesting, roles, decision-making, IP ownership and what happens to a founder's shares if they leave.
Co-founders usually sign it before or soon after incorporating, long before any investor arrives. It sets out how the shares are split and held, puts every founder on vesting, defines good and bad leavers and the price at which unvested shares are bought back, names each founder's role and time commitment, sets a tie-breaker for deadlock, assigns all IP to the company and says how founder money is treated. You meet it when you incorporate with a co-founder, when a co-founder is still employed elsewhere, and when an investor asks about founder vesting. What it means for you: it binds the founders as a contract once stamped and signed, but its share terms bind the company and later shareholders only if the Articles carry them too, and a shareholders' agreement usually absorbs it at the first priced round.
How Founders' agreement works
A founders' agreement is an ordinary contract under the Indian Contract Act 1872, signed by every co-founder and, once it exists, by the company. It needs stamping under the Stamp Act of the State where it is signed, on or before the day it is signed, and no registration. Teams that sign before incorporation have the company sign on after it is formed, so the company is a party to the promises about its own shares.
The core clauses are the split and how the shares are held; vesting, usually four years with a one-year cliff, written as a right for the other founders or a nominee to buy back unvested shares at face value; good and bad leaver terms; each founder's role, title and time commitment; reserved decisions and a tie-breaker for deadlock; assignment of all past and future IP to the company; confidentiality and non-solicitation; how founder money is treated; transfer limits such as a right of first refusal; and dispute resolution, usually arbitration.
Two Indian rules shape the drafting. Restrictions on transferring shares bind the company and a later shareholder only if the Articles of Association contain them, as the Supreme Court held in V.B. Rangaraj v. V.B. Gopalakrishnan, so the share terms are copied into the Articles by special resolution under Section 14 of the Companies Act, with MGT-14 filed within 30 days. And a ban on competing after a founder leaves is generally void under Section 27 of the Contract Act, so the protection comes from non-solicitation, confidentiality and leaver terms instead.
Aarav and Meera incorporate a Bengaluru private limited company in November 2026 with 54% and 46%, the split the Co-founder Prenup suggested. Their agreement puts both on four-year vesting with a one-year cliff, starts Meera's vesting on the day she goes full-time, records Aarav's ₹5 lakh as a director's loan repayable after the first round, makes Aarav CEO with a casting vote on operating matters, and assigns Meera's prototype code to the company. It is e-stamped in Karnataka and signed on 2 December, and the company passes a special resolution adding the buy-back right to its Articles, with MGT-14 filed on 20 December.
Mistakes we see with Founders' agreement
- Keeping the share terms only in the agreement, so a buy-back of a leaving founder's shares cannot be enforced against the company or a buyer of those shares.
- Promising a co-founder a percentage without saying it vests, so a founder who leaves in month six keeps a full stake.
- Leaving IP out, so code written before incorporation, or while a founder was still employed, does not clearly belong to the company when investors check.
- Relying on a non-compete after exit, which Indian courts generally refuse to enforce, instead of non-solicitation and leaver terms.
Last updated 28 October 2026. Checked against the MCA, GST, Income-tax and Trade Marks rules in force for October 2026.
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Questions founders ask about Founders' agreement
Is a founders' agreement the same as a shareholders' agreement?
No. A founders' agreement is between the co-founders, signed early, and covers the split, vesting, roles, IP and leavers. A shareholders' agreement comes with outside investors and adds their rights: board seats, vetoes, anti-dilution and exit terms. At the first priced round the founders' terms usually move into the shareholders' agreement.
Can co-founders change the split after signing?
Yes, by a written amendment every founder signs, with a share transfer or a fresh allotment to make it real and a special resolution if the Articles change. It is far easier before outside money comes in, because investors' consent rights apply after that.
What happens if there is no founders' agreement?
The Companies Act and the Articles decide. Each founder keeps every share issued to them whatever they later contribute, a departing founder cannot be made to sell, and IP created before incorporation stays with whoever made it. A dispute then goes to the National Company Law Tribunal or the civil courts with little in writing to rely on.