The Founder's Agreement — Vesting, Roles, and Co-Founder Exits
Quick Summary
The Founder's Agreement (also called Co-Founders Agreement) is the single most important contract between you and your co-founders — yet it's the one Indian founders most often skip. It handles founder vesting, role definitions, decision-making, IP assignment, and what happens if a co-founder leaves. This article shows what it must contain.
The Legal Breakdown / Why It Matters
Founder's Agreement: A contract between co-founders, governed by the Indian Contract Act, 1872, defining the rights, obligations, equity allocation, vesting, and exit mechanics among them. Unlike SHA, it focuses on founder-to-founder relations, not company-to-investor relations.
The 10 Mandatory Clauses
| Clause | Why It Matters |
|---|---|
| 1. Equity Split | Initial percentage held by each founder; locks the cap table foundation |
| 2. Vesting Schedule | 4-year vesting with 1-year cliff (Indian VC market norm); reverse vesting protects against co-founder leaving early |
| 3. Roles & Responsibilities | CEO / CTO / CPO clearly defined; prevents duplication and disputes |
| 4. Decision-Making | Operational (CEO call) vs. Strategic (unanimous/majority); reserved matters list |
| 5. IP Assignment | All pre-incorporation IP assigned to company; survives departure |
| 6. Confidentiality | Survives the contract; protects trade secrets indefinitely |
| 7. Non-Compete (During Tenure) | Enforceable during employment; post-departure is void under Section 27 |
| 8. Non-Solicitation | Of employees and clients, 12–24 months post-departure |
| 9. Leaver Provisions | Good Leaver / Bad Leaver definitions and equity forfeiture |
| 10. Dispute Resolution | Arbitration under Arbitration & Conciliation Act, 1996; specified seat |
Founder Vesting — The Indian VC Standard
| Element | Standard | Why |
|---|---|---|
| Total Vesting Period | 4 years | Industry norm |
| Cliff | 1 year | Forfeit all shares if exit before 1 year |
| Post-Cliff | Monthly / quarterly | Smooth vesting; no second cliff |
| Acceleration | Single or Double-trigger | Protects founders on M&A |
| Reverse Vesting | Company buyback option | Standard Indian Series A requirement |
Good Leaver vs. Bad Leaver
| Category | Definition | Consequence |
|---|---|---|
| Good Leaver | Departs due to death, disability, retirement, or termination without cause | Retains all vested shares; unvested forfeit at FMV or face value |
| Bad Leaver | Resigns voluntarily before tenure, or terminated for cause (fraud, misconduct, breach) | Loses some/all vested shares too; often forfeits at face value (₹10) |
How to Do It on Founding Legals
- Step 1: Go to Team → Founder's Agreement → Setup. Add each co-founder, their initial equity split, role, and start date.
- Step 2: Configure Vesting: Total period (default 4 years), Cliff (default 12 months), frequency (monthly/quarterly), and acceleration triggers.
- Step 3: Define Reserved Matters — strategic decisions requiring all-founder unanimous approval (e.g., M&A, fundraise, key hires, equity dilution).
- Step 4: Toggle the Reverse Vesting clause — converts already-held founder shares into buyback-eligible structure.
- Step 5: Generate, stamp (₹500 under Maharashtra Stamp Act), and e-sign via Aadhaar. The agreement is auto-linked to your Cap Table.
60% of Indian startup founder disputes — including high-profile ones reaching NCLT and the High Courts — stem from the absence of a written founder's agreement. A handshake agreement is technically valid under Section 9 of the Contract Act, but evidentially impossible to enforce. Sign a written, stamped, e-signed Founder's Agreement before the first product line of code.
Founders often delay this conversation because "we're all equals." But by Year 2, roles, contributions, and motivation diverge — and renegotiating equity then is brutal. Sign the Founder's Agreement on Day 1 with equal splits and identical vesting, so the system is fair, predictable, and renegotiable later only by mutual amendment.