A founders agreement is a written contract between the co-founders of a startup that records who owns how much, what each person must contribute, who owns the code and brand, and what happens to a founder's shares if they leave. In India it is enforceable as a contract under the Indian Contract Act, 1872, and it should be signed before or alongside incorporation, well before you raise money.
What is a founders agreement and why does it matter?
A founders agreement (also called a co-founder agreement) is the rulebook the founding team writes for itself. It records the equity split, each founder's role and time commitment, the vesting schedule that links shares to continued contribution, and the transfer of all intellectual property created for the venture into the company. It also sets out how decisions are taken, how deadlocks are broken and what happens if someone walks away.
Legally it is a contract under section 10 of the Indian Contract Act, 1872: an agreement made with free consent, by competent parties, for a lawful object and consideration. That means it binds the founders personally. However, rights that the company must honour, such as restrictions on transferring shares, rights of first refusal or the right to buy back a leaver's shares, should also be written into the Articles of Association (AoA). Indian courts have repeatedly refused to enforce share-transfer restrictions against a company where the AoA is silent.
Investors look at this document during due diligence. A clean founders agreement with reverse vesting and complete IP assignment answers two of the first questions every term sheet raises: will the founders stay, and does the company actually own its product? Getting it right early is far cheaper than fixing a cap table after a co-founder has already left with 30% of the equity.
The agreement works alongside other documents. Once you take outside capital, a shareholders agreement (SHA) and a share subscription agreement usually supersede many of its clauses, so the founders agreement should be drafted with a clear path to that transition.
Who needs a founders agreement?
Any business started by two or more people who expect to share ownership needs one, but the urgency is highest in these situations.
- Co-founders about to incorporate a private limited company or LLP and decide the shareholding
- Teams where one founder is full-time and another is part-time, still employed elsewhere or contributing only capital
- Tech startups where code, designs or a brand name were created by a founder before the company existed
- Founders planning to apply for Startup India (DPIIT) recognition or raise angel or seed funding
- Family members or friends going into business together, where informal understandings tend to break down
- Existing startups where a founder has already reduced involvement and the equity no longer reflects contribution
Benefits of Founders' Agreement Drafting
Protects the cap table
Reverse vesting means a founder who leaves in month eight does not walk away with their full stake. Unvested shares can be transferred back at a pre-agreed price, keeping equity available for the people building the company.
Company owns its IP
Code, logos, domain names and designs created before incorporation legally belong to the individual who made them. A written assignment moves that ownership to the company, which investors and acquirers will insist on.
Fewer deadlocks
A 50:50 split with no casting vote is a common way startups stall. The agreement sets decision thresholds, reserved matters and a tie-break route before emotions run high.
Cleaner fundraising
Due diligence moves faster when founder roles, vesting and IP are documented. Investors can map your clauses straight into the shareholders agreement instead of renegotiating basics.
Predictable exits
Good-leaver and bad-leaver definitions decide the price at which a departing founder's shares are bought, avoiding valuation disputes at the worst possible moment.
Legal requirements for a valid founders agreement
There is no licence to obtain, but the document must satisfy basic contract and corporate law requirements to hold up.
- Every founder must be competent to contract: at least 18 years old and of sound mind (section 11, Indian Contract Act)
- Consent must be free, without coercion, undue influence, fraud or misrepresentation, so each founder should get time to read and seek advice
- The object must be lawful; clauses that defeat a statute, such as a blanket ban on a founder ever working in the industry again, are void to that extent
- Share-related clauses must be consistent with the Companies Act, 2013 and be mirrored in the AoA to bind the company
- IP assignment must be in writing and signed by the assignor under the Copyright Act, 1957 and the Patents Act, 1970
- The document must be stamped as per the stamp law of the state where it is executed to be admissible in evidence
Documents required
Founder information
- Full legal names, addresses, PAN and Aadhaar of every founder
- Proposed or current shareholding and capital contribution of each founder
- Agreed role, title, time commitment and any outside employment or board positions
Company information
- Certificate of incorporation, MoA and AoA (if the company already exists)
- Current shareholding pattern and any share certificates already issued
- Details of any ESOP pool planned or approved
IP and business assets
- List of code repositories, domains, social handles, logos and designs created so far, with who created them
- Any trademark or copyright applications already filed and in whose name
- Prior employment contracts of founders containing IP or confidentiality clauses that might conflict
How we draft your founders agreement
A founders agreement is a negotiated document, so the process is built around getting all founders to the same understanding, not just producing a template.
Founder discovery call
We speak with all co-founders together to understand the business, contribution of each person, expected time commitment, funding plans and any existing disagreements. Joint calls surface mismatched expectations early.
Term sheet of key decisions
Before drafting, we send a one-page summary of the commercial choices: equity split, vesting period and cliff, leaver categories and pricing, reserved matters and non-solicit scope. Founders sign off on this first.
First draft
We draft the agreement under Indian law, with a schedule for IP assignment and a vesting table. Clauses are written so they can be lifted into the AoA and a future shareholders agreement without rework.
Review and negotiation
Each founder reviews the draft. We explain the effect of each clause in plain language and incorporate agreed changes. Founders may also take independent advice, which strengthens enforceability.
AoA alignment
Where the company exists, we prepare the matching AoA amendments for transfer restrictions, right of first refusal and leaver buy-back, and the special resolution and MGT-14 filing needed to adopt them.
Stamping
We compute stamp duty under the applicable state schedule and arrange e-stamp paper, for example through SHCIL in Delhi and Uttar Pradesh or the e-GRAS portal in Haryana.
Execution
Founders sign in wet ink or by Aadhaar eSign or DSC. We share a signing checklist so every page, schedule and annexure is executed and dated correctly.
Post-signing actions
We help file IP assignments where needed, update share records and set calendar reminders for vesting milestones and cliff dates.
Stamp duty and other government costs
There is no government filing fee for a founders agreement itself. The statutory cost is stamp duty, which is a state subject and depends on how the instrument is classified. A plain agreement usually falls under the residual 'agreement or memorandum of agreement' article of the state schedule, which carries a fixed amount. If the agreement itself transfers shares or assigns valuable IP for consideration, a different, value-based article may apply.
| Item | Amount | Note |
|---|---|---|
| Stamp duty on founders agreement | Fixed amount as per state schedule | Classified under the residual agreement article in most states; Delhi, UP and Haryana each set their own figure. We confirm the current rate when we prepare your e-stamp. |
| Stamp duty on share transfer (if any) | Value-based | Transfers of shares in a demat or physical form attract duty under the Indian Stamp Act as amended in 2019-20, collected at the applicable rate on consideration. |
| MGT-14 filing for AoA amendment | As per MCA fee table | Filing fee depends on the company's authorised capital under the Companies (Registration Offices and Fees) Rules, 2014. |
| Trademark or copyright recordal of assignment | As per IP office fee schedule | Only if a registered or applied-for mark or work is assigned to the company. |
Professional charges are quoted separately after reviewing your case. Government fees are paid directly to the authority.
How long does it take?
Drafting time depends mostly on how aligned the founders already are. A team that has agreed the equity split and vesting can sign within a week; teams still negotiating roles may take longer.
| Stage | Typical time |
|---|---|
| Discovery call and term sheet | 1–3 working days |
| First draft | 3–5 working days after term sheet sign-off |
| Review rounds | Depends on founders; typically 1–2 rounds |
| E-stamping and execution | Same day to 2 working days |
| AoA amendment and MGT-14 (if required) | Board and general meeting plus filing within 30 days of the resolution |
Enforceability and term
A founders agreement normally runs until the company raises its first priced round, when a shareholders agreement replaces most of its terms, or until all founders exit. Vesting clauses continue for the vesting period (four years with a one-year cliff is common, but any reasonable schedule is permitted). Confidentiality and IP assignment survive termination. Enforceability rests on three things: the document must be stamped before or at the time of execution under the state stamp law, share transfer restrictions must be reflected in the AoA, and post-exit restraints must be limited to what Indian courts accept, such as confidentiality and non-solicitation for a reasonable period, because a post-exit non-compete is void under section 27 of the Contract Act.
What to do after signing
- Adopt matching AoA provisions by special resolution and file MGT-14 with the Registrar of Companies within 30 days
- Record each founder's vesting schedule in the company's statutory register notes and internal cap table
- Move domain names, code repositories, social media handles and app store accounts into the company's name
- File trademark applications in the company's name rather than an individual founder's
- Issue each working founder an appointment letter or director service agreement that matches the founders agreement
- Revisit the agreement before signing any investor term sheet so conflicting clauses are resolved
Founders agreement vs shareholders agreement vs AoA
| Point | Founders agreement | Shareholders agreement | Articles of Association |
|---|---|---|---|
| Who signs | Co-founders (and company) | All shareholders incl. investors, and company | Adopted by company; binds all members |
| When | Before or at incorporation | At a funding round | At incorporation; amended by special resolution |
| Main focus | Roles, vesting, IP, founder exits | Investor rights, board seats, anti-dilution, exits | Constitutional rules of the company |
| Binds the company? | Only if company is a party and terms are in AoA | Only if terms are in AoA | Yes, statutorily |
| Filed with ROC? | No | No | Yes (and amendments via MGT-14) |
Common mistakes founders make
Equal split with no tie-breaker
A 50:50 company with two directors and no casting vote can be paralysed by a single disagreement. Agree a deadlock mechanism such as escalation to an independent adviser, mediation and then a buy-sell option.
No vesting at all
Issuing full equity on day one leaves no remedy if a founder stops contributing. Reverse vesting lets the company or remaining founders reacquire unvested shares at nominal or fair value.
IP left with individuals
Founders often assume the company owns what they built. Without a signed written assignment, copyright in pre-incorporation code stays with the author. An assignment that does not specify duration and territory is deemed by the Copyright Act to be for five years and for India only.
Lifetime non-compete
A clause that bars a founder from working in the sector for five years after leaving is void under section 27. Courts may still enforce confidentiality and reasonable non-solicitation, so draft those instead.
Unstamped or wrongly stamped document
A founders agreement signed on plain paper cannot be relied on in court until duty and penalty are paid. Stamp before or at signing.
Clauses that contradict the AoA
If the AoA allows free transfer while the founders agreement restricts it, the company is bound by the AoA. Align both documents.
Consequences of a weak or unstamped founders agreement
There is no regulator that fines you for not having a founders agreement; the cost shows up in disputes. An unstamped or under-stamped agreement is not admissible in evidence under section 35 of the Indian Stamp Act, 1899 until the deficit duty and penalty are paid. The Supreme Court's seven-judge bench confirmed on 13 December 2023 that such a document is not void, only inadmissible until cured, but curing it during a dispute is expensive. Missing IP assignment can derail an investment or acquisition, and an equity split without vesting can leave an inactive co-founder holding a large stake indefinitely.
| Default | Consequence | Provision |
|---|---|---|
| Relying on an unstamped or under-stamped agreement | Inadmissible until deficit duty plus penalty (up to ten times the deficiency under the central Act, varied by states) is paid | Section 35, Indian Stamp Act, 1899 |
| Post-exit non-compete clause | Void to the extent of the restraint; cannot be enforced | Section 27, Indian Contract Act, 1872 |
| Penalty-type exit forfeiture | Court awards only reasonable compensation up to the stipulated sum | Section 74, Indian Contract Act, 1872 |
Practitioner tips
- Use the term sheet step seriously. Most founder disputes we see trace back to an equity split that was agreed verbally over coffee and never revisited when roles changed.
- Define 'cause' for bad-leaver treatment narrowly and objectively, such as fraud, material breach not cured within 30 days or conviction. Vague terms like 'underperformance' invite litigation.
- If a founder is still employed elsewhere, check their current employment contract for IP and moonlighting clauses before they write a single line of code for the startup.
- Pay attention to how leaver shares are bought back. A company buy-back under section 68 of the Companies Act has strict conditions, so a transfer to remaining founders or a nominee is often simpler.
- Name a seat and governing law for disputes and add a mediation step before arbitration. Founders who still need to work together benefit from a cooling-off route.
How Lawgical Guru helps
Structured founder workshop
We run a guided discussion covering equity, vesting, roles, decision-making and exits, and turn it into a one-page term sheet all founders approve.
Drafting under Indian law
We draft the agreement with schedules for IP assignment, vesting and reserved matters, written to slot into your AoA and future investment documents.
Corporate alignment
We prepare AoA amendments, board and shareholder resolutions and the MGT-14 filing so the company itself is bound by the key terms.
Stamping and e-signing
We calculate stamp duty for your state and arrange e-stamp paper and electronic execution so you can sign from different cities.
Linked registrations
We can file your trademark registration in the company's name and support Startup India recognition once the founding documents are in place.
Founders' Agreement Drafting: frequently asked questions
Is a founders agreement legally binding in India?
Yes. It is a contract under the Indian Contract Act, 1872 and binds every founder who signs it. To make share-transfer restrictions and buy-back rights binding on the company, the same terms must also appear in the Articles of Association. The document should be stamped under your state's stamp law, otherwise it cannot be produced as evidence until duty and penalty are paid.
When should co-founders sign a founders agreement?
Ideally before incorporation or at the same time, and definitely before any outside investment. Signing early means IP created in the pre-company phase is assigned cleanly, and the equity split is agreed while everyone is still aligned. Startups that wait until a co-founder is already disengaged usually find the negotiation far harder.
What is reverse vesting for founders?
Reverse vesting means founders receive their full shares upfront, but a portion is treated as unvested and can be bought back if the founder leaves early. Unvested shares are released over time, commonly four years with a one-year cliff. It keeps voting and dividend rights with the founder while protecting the company if someone departs.
Can a founders agreement stop a co-founder from starting a competing business?
Only while they remain with the company. Section 27 of the Indian Contract Act makes any agreement restraining a person from carrying on a lawful trade void to that extent, and courts apply it strictly after exit. You can, however, enforce confidentiality obligations, IP assignment and a reasonable non-solicitation of employees and clients.
How much stamp duty is payable on a founders agreement?
It depends on the state where the agreement is executed. Most states treat it as a general agreement and charge a fixed duty under the residual agreement article of their schedule. If the document itself transfers shares or assigns IP for consideration, value-based duty may apply. Delhi and Uttar Pradesh e-stamps are generally issued through SHCIL, while Haryana uses its e-GRAS portal.
Does the company own code written by a founder before incorporation?
Not automatically. Copyright belongs to the author unless there is a written assignment signed by them. Founders are not employees of a company that did not exist yet, so the employer-ownership rule does not help. A founders agreement should include a present assignment of all venture-related IP to the company once it is incorporated.
Can a founders agreement be signed electronically?
Yes. The Information Technology Act, 2000 recognises electronic signatures such as Aadhaar eSign and DSC, and contracts formed electronically are valid. You still need to pay stamp duty, usually by attaching an e-stamp certificate generated in the state of execution before the founders sign.
What is the difference between a good leaver and a bad leaver?
A good leaver typically exits due to death, disability or with the board's consent, and their vested shares are bought at fair market value. A bad leaver exits through resignation within a lock-in period, termination for cause or breach, and may have to sell shares at a lower price. Exact definitions are negotiated and should be objective.
Do LLP partners need a founders agreement?
An LLP must have an LLP agreement filed with the Registrar, which covers capital, profit sharing and admission or exit of partners. Founder-specific points like vesting-style contribution milestones and IP assignment can be built into that LLP agreement or a supplementary agreement among the partners.
Will investors replace the founders agreement?
Usually in part. At a priced round, investors bring a shareholders agreement and share subscription agreement that override overlapping terms. Founder vesting is often re-set or confirmed in those documents. A well-drafted founders agreement makes this transition smoother because its clauses can be carried over without dispute.
Reviewed by Satyam Gupta, Company Secretary (CS) & Advocate
8+ years of industry experience. This page was last reviewed on 16 October 2026 against the official sources below. Rules and fees change — confirm on the official portal before you apply.