Founder / Co-Founder Agreement in India: Key Clauses, Importance, Cost & FAQs

4. Common Mistakes Founders Make

• “We Are Friends, So We Don’t Need an Agreement”

• Focusing Only on the Equity Split

• Using a Generic Foreign Template

• Not Addressing Founder Exit

• No Deadlock Mechanism

• What happens if the founders are equally divided on an important decision?

2. Why Should Founders Have a Founder Agreement?

2.1 It puts the equity split in writing

The agreement should set out the founders’ ownership in the company, which is probably the most critical provision.

The agreement can stipulate the ownership breakdown, the contribution of each founder (in money or otherwise), additional contribution obligations, the treatment of future funding rounds, dilution terms, and so on.

Stating “Founder A – 50%, Founder B – 50%” might be too simplistic.

2.2 It defines roles and responsibilities

Many things might seem obvious to the founders at the start, but it is worth putting them down in writing.

A written agreement can stipulate not only who does what but also whether anyone is employed full-time or part-time, what their responsibilities are, what they can spend, who has to report to whom, what their performance targets are, and so on.

This becomes particularly crucial if, for example, one founder is employed full-time while the other is not.

2.3 It prevents “50:50 deadlock”

A 50:50 split may seem fair, but it could also be a recipe for disaster if, for example, both founders have relatively equal voting power.

The deadlock provisions can stipulate, among other things:

• Reserved matters – what requires unanimous consent

• Voting thresholds

• Founder consent requirements

• Dispute resolution mechanisms, including mediation and arbitration

• Tie-breaking procedures

• Other deadlock resolution mechanisms etc.

3. Key Clauses in a Founder / Co-Founder Agreement

3.1 Founder Equity and Ownership

The agreement should stipulate each founder’s ownership in the company along with the terms and conditions pertinent to that ownership.

The agreement can stipulate the number or percentage of shares owned by each founder, the contribution of each founder to the capital, obligations to contribute to the capital in the future, and the treatment of dilution in case of new financing rounds.

3.2 Roles, Responsibilities and Time Commitment

The agreement should stipulate what is expected from each founder.

This is particularly essential to avoid misunderstandings about who is supposed to do what.

This can avoid situations where, for example, one founder feels they do much more than the other while the other founder thinks the opposite.

3.3 Founder Vesting

Founder vesting prevents a scenario where a founder leaves the project right after joining and retains their founder shares.

The agreement should stipulate the founder’s vesting schedule, including the cliff, and how their vested and unvested shares would be treated if they leave.

It is not uncommon for startups to implement a 4-year time-based vesting schedule with a 1-year cliff.

3.4 Intellectual Property Ownership

This is particularly crucial for tech, e-commerce, manufacturing, designer brands, etc.

Founders may bring in their ideas, software, code, logos, design, business processes, databases, and other intellectual property resources for the startup.

The agreement should stipulate who owns the IP created for the startup and what the terms of such ownership are.

3.5 Confidentiality

Founders typically have access to the company’s most critical information, which, if used irresponsibly or in bad faith, could seriously harm the company.

The agreement can stipulate what information qualifies as confidential, how it can be used, and what happens to it after the founder leaves.

3.6 Decision-Making and Reserved Matters

A company has a wide range of decisions, from day-to-day operations to big-picture strategy.

The agreements can stipulate what requires the approval of the founders and what they can delegate to the management.

Having a clear decision-making process is essential to avoid disagreements, especially during emergencies or if the founders unexpectedly find themselves in totally different camps.

3.7 Founder Exit and Good Leaver / Bad Leaver

The agreement should stipulate what happens to the founder’s shares when they leave, including the circumstances under which they can retain their shares and the terms otherwise.

The agreements can also provide that a founder who departed due to “good reasons” has better rights than a “bad leaver” who engaged in misconduct.

3.8 Share Transfer Restrictions

Founders typically do not want other founders to freely sell their shares to outsiders.

The agreements can stipulate that before selling their shares to a third party, exiting founders must offer those shares to other founders, which is known as ROFR (Right of First Refusal).

The agreements can also stipulate ROFO (Right of First Offer) or other similar provisions, including Tag-Along and Drag-Along rights, depending on the deal structure.

3.9 Dispute Resolution and Deadlock

Even the best of friends can sometimes disagree on what to do.

The agreement can set out a detailed dispute resolution mechanism, including internal steps, mediation, and arbitration.

It should also stipulate which law governs the agreement and which dispute resolution mechanism applies in case of a disagreement.

Starting a business with a co-founder often begins with trust: “We know each other, we will figure it out.”

But as the startup grows, questions that were once easy to ignore can become serious legal and business issues:

• Who owns what percentage?

• What happens if one founder stops working?

• Who gets to make the final decision?

• What happens if one founder wants to leave?

• Who owns the idea, code, brand or intellectual property created before incorporation?

• Can a departing founder continue to hold their shares?

• What happens if the founders are equally divided on an important decision?

1. What is Founder Agreement?

A Founder Agreement or Co-Founder Agreement is designed to answer these questions before they become disputes.

Under Indian law, an agreement can become a legally enforceable contract when it satisfies the requirements of the Indian Contract Act, 1872, including free consent, competent parties, lawful consideration and lawful object.

This article explains what a founder agreement is, why startups should consider having one, the important clauses it should contain, common mistakes founders make, its difference from a Shareholders' Agreement, and what founders can expect to pay for one in India.

Disclaimer: This article is for general educational purposes and does not constitute legal advice.

Frequently asked questions

Is a Founder Agreement the same as a Shareholders’ Agreement?

There is a difference between a Founder Agreement and a Shareholders Agreement. Whereas a Founder Agreement typically covers the relationship between the founders of a startup, a Shareholders Agreement typically covers the relationship between the shareholders of a company, including institutional investors.

A Shareholders Agreement typically addresses issues related to control over the company, the rights of investors, reserved matters, the appointment of directors, transfer of shares, fundraising, and exits.

Is a Founder Agreement legally binding in India?

In theory, a founder agreement can be valid and enforceable in India if it meets all the requirements of a valid contract and its provisions are not contrary to the law of the land.

However, even if two parties sign the agreement, it does not mean that all provisions will be deemed valid or that the parties cannot challenge them in court. The enforceability of particular provisions will depend on their wording, the applicable law, the corporate structure, and other factors.

How much does a Founder Agreement cost in India?

There is no standard price, but in general, most lawyers charge between ₹30,000 and ₹75,000+ per founder for a customized standard Founder Agreement, including the key points.

More complex, investor-ready documentation typically costs between ₹75,000 and ₹1.5+ Lakh per founder.

Should I choose a template or get a customized Founder Agreement?

A template can not replace proper legal advice. A template will typically have standard language that may or may not apply to the specific circumstances.

A customized agreement will better cover the needs of the company and address the particular issues that the founders want to include or exclude.

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