Key points
- Vesting over four years with a one-year cliff is standard; without it a departing founder keeps all their shares.
- Every founder must assign existing and future IP to the company in writing; without a written assignment, copyright stays with the individual.
- Post-exit non-competes are largely unenforceable in India under Section 27 of the Contract Act, so protect the company through confidentiality, non-solicitation and IP ownership instead.
Equity and vesting
Record the split and the reasons for it. Vesting is implemented in India through a combination of the agreement and the articles of association, because company law does not recognise unvested shares as such: unvested shares are typically subject to a call option or transfer at par to the company or the other founders on departure. Good leaver and bad leaver provisions decide the price.
Roles and decisions
Define who does what, the time commitment, and which decisions need unanimity (new shareholders, borrowing above a threshold, sale of the business, changes to founders' compensation). Deadlock mechanisms save companies.
Intellectual property
Under the Copyright Act, work created before incorporation, or by a founder who is not an employee, belongs to the founder unless assigned in writing. The agreement should include a present assignment of all IP relating to the business, and the company should also sign employment or consultancy contracts with founders containing IP clauses.
Confidentiality, non-solicit, non-compete
Confidentiality and non-solicitation of employees and customers for a reasonable period after exit are enforceable. A non-compete after leaving is void under Section 27 except in narrow cases, so do not rely on it.
Exit and transfer
Right of first refusal, tag and drag provisions, and what happens on death or incapacity. Pre-emption on new issues protects against dilution.
Disputes
Arbitration seated in the company's city, with an institution named, is the practical choice.
Frequently asked questions
Should the founders' agreement be part of the articles of association?
The key transfer restrictions and vesting mechanics should be reflected in the articles, because under Indian company law the company is bound by its articles, not by a private agreement among shareholders.
Can a founder be a full-time employee of the company?
Yes, and usually should be, with a written employment agreement covering salary, IP and confidentiality. Directors who are employees are whole-time directors and certain Companies Act provisions on remuneration apply.
Related practice area: Start-up Advisory
This article is for general information and does not constitute legal advice. Laws, rules and limitation periods change and depend on the facts; please take advice on your own situation before acting. Reading this article does not create a lawyer-client relationship with Akhtars Legalitarian.