Drafting a founders’ agreement is like writing a “pre-nuptial” for your startup. In India, while the Companies Act, 2013, provides the legal framework, the agreement itself is a private contract that governs the relationship between co-founders before the formal incorporation of a company. How to draft a founders’ agreement?
Here is a guide to the essential components and the process for drafting one.
A solid agreement prevents “founder fallout” by clearly defining expectations.
| Section | What it Covers |
| Equity Split | The percentage of ownership for each founder. Avoid a 50/50 split if possible to prevent deadlocks. |
| Vesting Schedule | Usually a 4-year period with a 1-year cliff. This ensures founders earn their shares over time rather than getting them all upfront. |
| Roles & Responsibilities | Specific designations (CEO, CTO, COO) and their decision-making powers. |
| Intellectual Property (IP) | A clause stating that all IP created for the startup belongs to the entity, not the individual founders. |
| Exit & Termination | What happens if a founder leaves? Look into “Good Leaver” vs. “Bad Leaver” clauses. |
| Restrictive Covenants | Non-compete and non-solicitation clauses to prevent a departing founder from starting a rival business immediately. |
To make the agreement legally binding in India, you need to follow these procedural steps:
The Indian Contract Act, 1872: Ensure the agreement meets the criteria of a valid contract (offer, acceptance, and lawful consideration).
Stamp Duty: The agreement must be printed on non-judicial stamp paper. The value of the stamp paper varies by state (usually ₹100 to ₹500 for a simple agreement).
Notarization: While not strictly mandatory for the contract to be valid, getting it notarized adds an extra layer of authenticity.
Transition to SHA: Once you incorporate as a Private Limited company, the Founders’ Agreement is typically superseded by a Shareholders’ Agreement (SHA) and the Articles of Association (AoA).
The “Kitchen Table” Talk: Discuss the “uncomfortable” scenarios first. What happens if someone gets sick? What if you disagree on a pivot?
Draft a Term Sheet: Outline the basic points in bullet form before moving to legalese.
Consult a Professional: While templates are a great starting point, have a startup lawyer review the final draft to ensure it complies with the latest SEBI or MCA regulations if you plan to raise funds soon.
Pro-Tip: In India, the “Right of First Refusal” (ROFR) is a crucial clause. It ensures that if one founder wants to sell their shares, they must offer them to the remaining founders first before looking for an outside buyer.
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