Last verified: 2026-06-18
Two engineers leave their jobs to build a product. They split the equity 50-50 over coffee, shake hands, and start shipping code. No paper. Eighteen months later one of them wants out, takes half the cap table with him, and the company that raised its first cheque on the strength of “the founding team” is suddenly a single founder holding 50 percent of his own startup. Nobody did anything illegal. They just never wrote down what was supposed to happen.
That story repeats across Indian startups every year, and the public ones are only the visible tip. When a property-listing unicorn’s board removed one of its co-founders in 2015, the fight that followed played out in boardrooms and the press because the governance terms were thin. When a fintech lender’s co-founder exited in 2022 amid a governance review, the dispute turned on vesting, control, and what a departing founder was entitled to keep. The promoter rift inside one of India’s largest airlines has run for years over shareholder-agreement clauses the founders signed and then read differently. Different industries, same root cause: founders who agreed on the vision but never agreed, in writing, on what happens when things go wrong.
A co-founder agreement is the document that fixes that. It is not glamorous, it does not raise money, and most founders treat it as a formality to get to later. Later is usually a deposition.
Here’s the thing about Indian startups specifically: the agreement has to do more work than its US cousin. It has to survive Section 27 of the Indian Contract Act, 1872, which voids most post-exit non-competes outright. Its share-vesting terms bind the company only if they’re mirrored into the articles of association, a rule the Supreme Court laid down decades ago. And the intellectual property your co-founder wrote before the company existed does not belong to the company by default. It belongs to your co-founder, until a signed assignment says otherwise.
This guide walks through every clause that matters, gives you a clause-by-clause template you can actually use, and shows you which protections hold up in an Indian court and which ones are decorative.
A co-founder agreement is a written contract between the founders of a startup that fixes, before money or conflict arrives, how equity is split, how each founder’s shares vest, who does what, who owns the intellectual property, and what happens when a founder leaves. In India it is enforceable as a contract under Section 10 of the Indian Contract Act, 1872. Its core clauses are equity split, vesting and leaver provisions, roles and time commitment, decision-making and deadlock, IP assignment, confidentiality, non-compete and non-solicit, and exit and dispute resolution. Share-related terms bind the company itself only when they are also written into the articles of association.
That’s the shape. The detail is where founders win or lose, so let’s take it clause by clause.
What a co-founder agreement is, and why Indian startups that skip it pay later
A co-founder agreement (also called a founders’ agreement) is the first real contract a startup signs, and it’s the one founders most often skip. It records the understanding between the people starting the company: their equity, their roles, their commitments, and the rules for what happens if one of them leaves, underperforms, or wants to sell. Think of it as the prenuptial agreement of a startup. You sign it while everyone still likes each other, precisely because that is the only time you can negotiate it fairly.
Why does skipping it cost so much? Because in the absence of a written agreement, the default rules take over, and the defaults are brutal. Equity issued at incorporation is fully owned the day it’s allotted. There’s no automatic vesting, no automatic claw-back, no built-in exit price. A founder who quits in month six keeps every share unless a contract says otherwise. We’ve seen this exact scenario sink otherwise fundable companies, because no investor wants to back a cap table where a departed founder owns a third of the business and contributes nothing.
What the agreement actually covers
The agreement covers four buckets of risk. Money: how equity is split and how it vests. People: who does what, who decides what, and how disputes get resolved. Assets: who owns the code, the brand, and the trade secrets. And the exit: the terms on which a founder can leave or be removed, and what happens to their shares when they do.
Each bucket maps to specific clauses, which the next section lays out in full. The principle underneath all of them is the same: convert every assumption into a written term while the assumption is still shared.
Co-founder agreement vs shareholders’ agreement vs incorporation documents
Founders constantly confuse these three, so let’s draw the lines clearly. The co-founder agreement is the earliest and most personal: it’s between the founders, often signed before or right at incorporation, and it governs the founder relationship. The shareholders’ agreement (SHA) comes later, usually when investors arrive, and it governs the relationship between all shareholders, including those investors. The memorandum and articles of association (MoA and AoA) are the company’s constitutional documents filed with the Registrar of Companies.
| Document | Between whom | When signed | What it governs | Binds the company? |
|---|---|---|---|---|
| Co-founder agreement | The founders | Pre-incorporation or at incorporation | Equity, vesting, roles, IP, exit between founders | Only via the AoA |
| Shareholders’ agreement (SHA) | All shareholders (founders + investors) | At first funding round | Governance, transfer, investor rights | Only via the AoA |
| MoA and AoA | The company and its members | At incorporation (filed with RoC) | Company’s powers, share rules, internal governance | Yes, directly |
| ESOP plan | Company and employees | When hiring begins | Employee equity pool | Via board/shareholder resolution |
Here’s the part most founders miss: a clause sitting only in your co-founder agreement does not bind the company. If you want a vesting buy-back or a transfer restriction to be enforceable against the company and against a stubborn co-founder, the share-related terms have to be carried into the AoA. More on that below, because it’s where good agreements quietly fail.
Is a co-founder agreement legally binding in India?
Yes. A co-founder agreement is a contract, and it’s enforceable like any other contract that satisfies Section 10 of the Indian Contract Act, 1872: free consent, lawful consideration, competent parties, and a lawful object. The founders’ mutual promises (equity, effort, IP) supply the consideration. Sign it, and the personal obligations between founders bind them.
But “binding between the founders” and “binding on the company” are two different things, and so is “enforceable as written.” Some clauses founders love, like a broad post-exit non-compete, are void in India no matter how carefully you draft them. We’ll flag each one as we go. The short version: the agreement is binding, but a few of its most-wanted clauses aren’t, and knowing which is the difference between a document that protects you and one that just looks like it does.
The nine clauses every Indian co-founder agreement must contain
Strip a founders’ agreement down to its load-bearing walls and you get nine clauses. Miss any one and you’ve left a gap that a future dispute will find. What are they, and why these nine?
They are: equity split; vesting and the leaver clause; roles, responsibilities and time commitment; decision-making and deadlock; intellectual property assignment; confidentiality; non-compete and non-solicit; exit and termination; and dispute resolution. Everything else in a founders’ agreement is either definitions, boilerplate, or a sub-point of these nine.
The rest of this guide takes them in order of how much damage they do when they’re missing. Equity, vesting, and IP cause the most founder-destroying disputes in India, so they come first. The procedural clauses (decision-making, dispute resolution) matter enormously but tend to surface later. For the broader, more general walkthrough of the drafting process, iPleaders’ guide on how to draft a co-founders’ agreement is a useful companion; this post focuses on the startup-specific clauses and the 2026 legal position.
Equity split and ownership: getting the cap table right at the start
Equity is the clause founders fight over first and regret most. It answers one question: who owns how much of the company, and why? Get this wrong and every later decision, from fundraising to exit, inherits the mistake. So how should two or three people who just quit their jobs actually divide a company that’s worth nothing yet?
Equal vs unequal splits and dynamic equity
The instinct is to split equally. It feels fair, it avoids an awkward conversation, and it signals trust. It’s also the split most likely to cause trouble, because it freezes a snapshot of contribution that will change. One founder ends up working full-time while another stays in their job for a year. One brings the idea and the capital; another brings the code. A rigid 50-50 ignores all of that, and it creates a deadlock structure where no one can break a tie (we’ll come back to deadlock).
Unequal splits, set deliberately, tend to age better. Weight the equity by what each founder actually brings: full-time commitment, capital contributed, domain expertise, the IP they’re assigning in, and the role’s risk. Some founders use a dynamic-equity model (sometimes called a “slicing pie” approach), where ownership accrues over time in proportion to measured inputs like hours and cash, rather than being fixed on day one. It’s more complex, and frankly most early teams don’t need it, but it’s worth knowing the option exists when contributions are genuinely uncertain at the start.
Whatever ratio you pick, write down the reasoning. A one-paragraph note on why the split is 60-25-15 is worth its weight in a future argument, because memory is self-serving and the document isn’t.
Sweat equity, the napkin-split trap, and the Companies Act route
The “napkin split” trap is signing a number without a structure. Two founders write “50-50” on a napkin, allot the shares at incorporation, and now both hold fully-vested equity with no strings. If one leaves next quarter, the napkin says he keeps it. The fix isn’t a different number. It’s pairing the number with vesting, which is the next section.
When a founder is contributing effort or know-how rather than cash, the formal route to reward that is sweat equity. Under Section 54 of the Companies Act, 2013, a company can issue sweat equity shares to directors or employees for non-cash consideration: their know-how, their IP, or value additions to the company. The issue needs a special resolution and has to respect the ceilings in Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014, with a more generous lifetime ceiling for DPIIT-recognised startups (which can issue substantially more sweat equity in their early years than an ordinary private company). For most founding teams, though, the cleaner approach is to allot founder shares at face value at incorporation and govern them with vesting, rather than running a sweat-equity issuance each time.
Founder vesting and the leaver clause: the single most important protection
If you read only one section of this guide, read this one. Vesting is the mechanism that ties a founder’s equity to their continued contribution, and the leaver clause decides what happens to that equity when they go. Together they’re the single most important founder protection in the agreement, and they’re the clause most likely to be missing from a DIY draft. Why does it matter more than equity split itself? Because a perfect split with no vesting still lets a founder walk away with everything on day 60.
The vesting schedule: 4 years, 1-year cliff
The market-standard founder vesting schedule is four years with a one-year cliff. In plain terms: a founder earns their equity over four years, and if they leave within the first year, they earn nothing (that’s the cliff). Survive the cliff and a year’s worth (25 percent) vests at once; the rest then vests monthly or quarterly across the remaining three years. Leave at the two-year mark and you’ve vested roughly half.
There’s an Indian wrinkle worth understanding. In the US, founder shares are often issued and then “reverse vest.” In India, founder shares are typically allotted in full at incorporation, so the same result is engineered differently: the founder holds all the shares, but the agreement gives the company or the other founders a right to buy back the unvested portion at a nominal price if the founder leaves early. The economic effect is identical to vesting; the legal mechanism is a buy-back right over already-issued shares. For a deeper walkthrough of how to draft this specific provision, see iPleaders’ guide on drafting a vesting clause in a co-founders’ agreement.
Good leaver vs bad leaver and the buy-back price
Not every departure is the same, and the leaver clause is where you say so. A “good leaver” leaves for reasons outside their control or fault: death, permanent disability, or removal without cause. A “bad leaver” resigns voluntarily before a milestone, gets terminated for cause (fraud, gross misconduct, material breach), or walks out to compete.
The distinction drives the buy-back price. A good leaver typically keeps their vested shares and is bought out of the unvested portion at fair market value, or keeps the vested shares outright. A bad leaver is usually bought out of the unvested shares at the lower of cost or fair market value, and sometimes loses a slice of vested equity too. The drafting fight is always over the definition of “bad leaver.” Founders want it narrow (only fraud and competing); the agreement’s job is to make the categories explicit so no one improvises the definition mid-dispute. Be specific about the triggers, the valuation method, and who does the valuing.
How founder vesting is actually enforced in India
Here’s where good agreements quietly fail. A buy-back right that lives only in the co-founder agreement is a personal promise between founders. If the leaving founder refuses to transfer the shares, you’re left suing for specific performance, which is slow. Worse, a share-transfer restriction is enforceable against the company only if it’s written into the articles of association.
That rule comes from V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160, where the Supreme Court held that a restriction on share transfer agreed privately between shareholders does not bind the company unless it’s incorporated into the AoA. Section 58 of the Companies Act, 2013 recognises that a private company’s articles can validly restrict share transfers, which is exactly the hook you use. So the enforcement recipe is: write the vesting and leaver buy-back into the co-founder agreement, then mirror the transfer restriction and buy-back right into the AoA at incorporation (or amend the AoA at the first opportunity). Skip the AoA step and your vesting clause is a paper tiger against a founder who decides to hold his shares hostage.
Roles, responsibilities, time commitment, and decision-making
Equity tells you who owns the company. This clause tells you who runs it, and how decisions get made when the founders disagree. It sounds soft compared to the money clauses, but ambiguous roles and undefined decision rights cause as many founder break-ups as equity does. The question this clause answers: when two smart, committed founders want opposite things, who wins?
Defining roles, titles, and full-time commitment
Start with roles and titles. One founder is CEO, another is CTO, a third runs growth. Spell out who owns which function, because overlapping authority breeds turf wars and gaps breed neglected work. Titles aren’t vanity here; they allocate decision authority.
Then nail the time commitment, which is the most under-drafted term in Indian founders’ agreements. Is each founder full-time from day one? If a founder is keeping a job for six months, say so, say for how long, and link it to vesting (a part-time founder might vest slower). Define what “full-time” means: hours, exclusivity, no competing side projects. A founder who treats the startup as a weekend hobby while drawing a full equity stake is a dispute waiting to happen, and a clear commitment clause is what lets the other founders act on it through the leaver provisions.
Decision-making, reserved matters, and the deadlock clause
Day-to-day decisions should sit with the relevant founder by role: the CEO decides commercial matters, the CTO decides technical ones. But some decisions are too big for one person. List them as reserved matters that need unanimous or supermajority founder consent: issuing shares, taking on debt, selling the company, changing the business, large spends above a threshold, hiring or firing another founder. Keep the operational threshold high enough that the company can actually function (a Rs 50,000 approval gate paralyses a real business; pick a number that catches the genuinely big calls).
Then plan for deadlock, because a 50-50 company with no tiebreak is a company that can freeze itself solid. What happens when the founders simply can’t agree on a reserved matter? Sensible mechanisms, in escalating order: a cooling-off period and mandatory discussion; mediation by a trusted neutral or a designated advisor; a casting vote given to one founder or the chair for defined matters; or, as a last resort, a buy-sell mechanism (one founder names a price, the other chooses to buy or sell at it). Pick one and write it in. Deadlock clauses feel pessimistic to draft. They’re the cheapest insurance in the document.
Intellectual property assignment and confidentiality
For most startups the only asset worth anything in the early years is intellectual property: the code, the designs, the brand, the algorithms, the customer data. This clause makes sure that IP belongs to the company and not to whichever founder happened to write it. Sounds automatic? It isn’t. In India, the default rule runs the other way for anything created before the company existed.
Pre-incorporation IP assignment
Under Section 17 of the Copyright Act, 1957, the author of a work is its first owner. There’s an exception for work made in the course of employment under a contract of service, where the employer owns it, but think about the timing. The most valuable founder IP, the prototype, the first version of the code, the brand name, is usually created before the company is incorporated, when there’s no company to employ anyone. So that IP is owned personally by the founder who made it, full stop, until it’s assigned to the company in writing.
An assignment of copyright has to be in writing and signed to be valid. The same logic applies to inventions (assign the right to apply for patents) and to trademarks and domain names registered in a founder’s personal name. The clause you need does two things: it assigns all pre-incorporation IP relating to the business to the company on incorporation, and it assigns all future IP each founder creates for the company on an ongoing basis. Without it, a departing co-founder can credibly claim he still owns the core technology, and that claim alone can freeze a funding round. This is the single most overlooked clause in founder-drafted agreements, and it’s the one investors’ lawyers check first.
Confidentiality and the overlap with an NDA
The confidentiality clause binds each founder to keep the company’s trade secrets, strategy, customer lists, and technical know-how confidential, during the venture and after they leave. Unlike a post-exit non-compete, a confidentiality obligation is generally enforceable in India even after a founder departs, because protecting genuine trade secrets isn’t treated as a restraint of trade.
If the founders exchanged sensitive information before signing the full agreement (or while still evaluating whether to work together), a standalone non-disclosure agreement covers that earlier window; iPleaders’ guide on how to draft an NDA in India walks through the mechanics. Inside the co-founder agreement, the confidentiality clause does the same job on an ongoing basis. Make it survive termination, define “confidential information” precisely, and carve out the usual exceptions (information already public, independently developed, or disclosed under legal compulsion).
Non-compete and non-solicit: what is actually enforceable under Section 27
Now, here’s where it gets interesting, because this is the clause Indian founders most often get wrong by copying a US template. Every founder wants a non-compete: if my co-founder leaves, he shouldn’t be allowed to start a rival and take our playbook with him. Reasonable instinct. The problem is that Indian law mostly won’t enforce it. So what actually works?
Section 27 and the restraint-of-trade bar
Section 27 of the Indian Contract Act, 1872 says that every agreement that restrains anyone from exercising a lawful profession, trade, or business is void to that extent. There’s one statutory exception, for the sale of goodwill, and a few carved out by other statutes (like the Partnership Act). Indian courts, unlike English or American ones, do not ask whether a restraint is “reasonable.” If it restrains trade and doesn’t fit an exception, it’s void. That’s the whole ballgame.
During the venture vs after exit
The crucial line is timing. A negative covenant that operates while a founder is still inside the company is valid. In Niranjan Shankar Golikari v. Century Spinning and Mfg. Co. Ltd., AIR 1967 SC 1098, the Supreme Court upheld a restraint that applied during the term of the contract, reasoning that a restriction operating while the relationship subsists isn’t a restraint of trade in the prohibited sense. So a clause barring a founder from running a competing business while they’re still a founder or employee holds up.
After the founder exits is a different story. In Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981) 2 SCC 246, the Supreme Court treated a post-service non-compete as void under Section 27. The Court reinforced the point in Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, (2006) 4 SCC 227, holding that a restrictive covenant extending beyond the term of the contract is a restraint of trade and unenforceable. The takeaway is blunt: a clause that says “after you leave, you can’t compete for two years” is, in almost every case, worth nothing in an Indian court. Drafting it longer or “more reasonably” doesn’t save it.
Drafting a non-solicit that survives
So what protects you after a founder walks? Three things, none of them a post-exit non-compete. First, confidentiality and IP assignment, which survive exit and protect the actual assets. Second, a non-solicitation clause, which restricts a departing founder from poaching the company’s employees and customers; courts treat narrow, genuine non-solicits more sympathetically than blanket non-competes, though even these get scrutinised and should be kept tight in scope and duration. Third, and most powerful, the bad-leaver equity forfeiture from your vesting clause. You can’t injunct a departed founder from competing, but you can make leaving to compete a “bad leaver” trigger that costs them their unvested (and sometimes vested) shares. That’s an economic deterrent the law will actually back, because it operates on the shares, not on the person’s right to trade.
Exit, termination, and dispute resolution
Every founder relationship ends eventually, by acquisition, by IPO, or by someone walking away. This clause governs the unhappy version: a founder leaving early, being removed, or the founders falling out completely. The question it answers is the one founders least want to discuss at the start: how do we break up without breaking the company?
Voluntary exit, forced exit, and what happens to equity
Separate the two routes. A voluntary exit is a founder choosing to leave; a forced exit is the other founders removing one, for cause or under an agreed mechanism. For each, the agreement should state the notice required, the consequence for unvested equity (the leaver clause does this work), the treatment of vested equity, and any transition obligations (handover, continued confidentiality, return of company property). Tie the equity consequences back to the good-leaver/bad-leaver framework so there’s a single, consistent answer.
The cleanest agreements also include a buy-sell or transfer mechanism: if a founder wants to sell, the company and the other founders get a right of first refusal before any outsider can buy in. That keeps the cap table closed and stops a disgruntled founder from selling a stake to a competitor. Like the vesting buy-back, this transfer restriction has to be mirrored in the AoA to bind the company, per V.B. Rangaraj.
Dispute resolution, arbitration, and governing law
When founders fight, you don’t want the fight to start with an argument about where to fight. Specify governing law (Indian law) and a dispute-resolution path. The sensible sequence is escalation: good-faith negotiation between founders first, then mediation, then arbitration under the Arbitration and Conciliation Act, 1996 if it isn’t resolved. Arbitration keeps the dispute private (which matters when the company’s reputation is the asset) and is faster than litigation, though not always cheaper.
Name the seat of arbitration (a city in India for a domestic founding team), the number of arbitrators (a sole arbitrator for early-stage simplicity), and the language. For founders who want to understand how these break-ups actually play out and how to head them off, iPleaders’ rundown of co-founders’ agreement disputes and suggestions is worth a read. A tight dispute clause won’t prevent conflict, but it stops conflict from metastasising into a two-year courtroom saga.
Co-founder agreement template for Indian startups: clause by clause
Below is a clause-by-clause skeleton you can adapt. Treat it as a starting structure, not a finished contract: fill the brackets, delete what doesn’t apply, and have a lawyer review it before you sign, because the few hundred rupees of stamp duty and a counsel’s read are nothing against the cost of getting vesting or IP wrong. Each clause maps to a section above.
1. Parties and date. Names and addresses of each founder [Founder A, Founder B, …], the company [name, or “the company proposed to be incorporated as ___”], and the effective date.
2. Recitals and purpose. A short statement that the parties are co-founding [company] to carry on the business of [describe the business], and are agreeing terms governing their relationship.
3. Equity split. Each founder’s shareholding [Founder A: %; Founder B: %], the class of shares, and a one-line note on the basis for the split (capital, full-time role, IP, expertise).
4. Capital and contributions. What each founder contributes: cash [Rs ___], assets, IP, or services, and by when.
5. Vesting. Vesting schedule [4 years, 1-year cliff, monthly/quarterly thereafter], the buy-back right over unvested shares on early exit, and the nominal buy-back price [face value / cost].
6. Leaver provisions. Definitions of good leaver and bad leaver, the buy-back price applicable to each [good leaver: fair market value; bad leaver: lower of cost or FMV], and who values the shares.
7. Roles and responsibilities. Each founder’s title and functional ownership [CEO, CTO, …], and the time commitment [full-time / part-time until ___], including an exclusivity obligation.
8. Decision-making and reserved matters. Day-to-day authority by role; the list of reserved matters needing unanimous or supermajority founder consent; the spending threshold above which approval is required.
9. Deadlock resolution. The mechanism [cooling-off and discussion; mediation; casting vote; buy-sell] that applies when founders can’t agree on a reserved matter.
10. Intellectual property assignment. Assignment of all pre-incorporation IP relating to the business to the company, and ongoing assignment of all IP created by each founder for the company; an obligation to execute any further documents needed to perfect the assignment.
11. Confidentiality. Obligation to keep company information confidential during and after the venture; definition of confidential information; standard carve-outs; survival after exit.
12. Non-compete and non-solicit. A non-compete that operates only while a founder remains a founder or employee (in-term); a non-solicitation of employees and customers, kept narrow in scope and duration; reliance on the bad-leaver forfeiture for post-exit protection.
13. Exit and transfer. Voluntary and forced exit routes; notice periods; right of first refusal for the company and other founders before any transfer to an outsider; treatment of vested and unvested shares on exit.
14. Dispute resolution and governing law. Indian governing law; escalation through negotiation and mediation to arbitration under the Arbitration and Conciliation Act, 1996; seat, number of arbitrators, and language.
15. AoA mirroring. A covenant that the founders will procure that the company’s articles of association reflect the transfer restrictions, vesting buy-back, and reserved matters, so they bind the company (per V.B. Rangaraj).
16. General. Stamping, counterparts, amendment only in writing, severability (so that if one clause, say an over-broad non-compete, is held void, the rest survives), and the entire-agreement clause.
For the funding stage that comes next, when investors arrive and the founders’ arrangement gets folded into a broader shareholders’ agreement and a term sheet, the co-founder agreement becomes the foundation those documents build on. Get it right now and the later paperwork inherits clean terms.
Common mistakes Indian founders make
Most founder disputes trace back to a small set of avoidable drafting mistakes. Here are the ones we see most, and the one-line fix for each. Why list them separately when the clauses above already cover the right way? Because knowing the clause exists and knowing the specific trap are different kinds of useful.
The first is splitting equity equally by reflex, with no vesting attached. The fix isn’t a different ratio; it’s pairing whatever ratio you choose with a four-year vesting schedule and a leaver clause. The second is skipping the IP assignment, leaving pre-incorporation code and brand owned personally by a founder. The fix is an assignment clause that transfers all business IP to the company, in writing. The third is relying on a post-exit non-compete that Section 27 makes void. The fix is to protect yourself through confidentiality, non-solicit, IP assignment, and bad-leaver forfeiture instead.
The fourth is keeping everything oral, or in a chat thread, on the theory that “we trust each other.” Trust is exactly why you can negotiate fairly now; the document is for the version of you that no longer agrees. The fifth is drafting a beautiful agreement and never mirroring its share terms into the AoA, so the vesting and transfer restrictions don’t bind the company. The sixth is forgetting deadlock entirely in a 50-50 company, leaving no way to break a tie. And the seventh is treating the agreement as a one-time document, instead of revisiting it at the first funding round, when it should evolve into or align with the shareholders’ agreement.
How to draft and execute your co-founder agreement, step by step
Turning the clauses above into a signed, enforceable document takes about seven steps. None of them is hard; the discipline is in not skipping the unglamorous ones (stamping, AoA mirroring) that decide whether the agreement actually works.
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Align on the commercial terms first. Before anyone drafts, the founders agree the substance: the equity split and its rationale, who’s full-time, who does what, and the vesting schedule. Write these down in a short term sheet so the drafting starts from a shared understanding, not a blank page.
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Choose the equity split and vesting structure. Fix the percentages, the four-year/one-year-cliff vesting, and the buy-back price for unvested shares. This is the spine of the agreement; settle it before the wording.
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Draft the full clause set. Use the sixteen-clause template above as the skeleton. Fill the brackets, delete what doesn’t apply, and keep the language plain. Pay special attention to the leaver definitions and the IP assignment, the two clauses that cause the most trouble when vague.
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Lock down IP and confidentiality. Make sure the IP assignment captures pre-incorporation work and ongoing creations, and that confidentiality survives exit. If sensitive information changed hands earlier, back it with an NDA covering that period.
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Stamp and sign. A co-founder agreement is an agreement for stamp-duty purposes; pay the stamp duty applicable in your state (it’s modest, typically a few hundred rupees, and varies state to state) so the document is admissible in evidence. All founders sign, ideally before witnesses; notarisation adds a layer of proof though it isn’t mandatory.
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Mirror the share terms into the AoA. This is the step DIY drafters skip. Carry the transfer restrictions, vesting buy-back, and reserved matters into the company’s articles of association at incorporation, or amend the AoA at the first opportunity, so the terms bind the company per V.B. Rangaraj.
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Revisit at every funding round. When investors arrive, the founders’ arrangement folds into a shareholders’ agreement and updated AoA. Treat the co-founder agreement as a living document: review it at each round, and reconcile it with the SHA so the two never contradict each other.
Frequently asked questions
1. Is a co-founder agreement legally binding in India?
Yes. It’s a contract enforceable under Section 10 of the Indian Contract Act, 1872, provided there’s free consent, lawful consideration, competent parties, and a lawful object. The mutual promises between founders supply the consideration. It binds the founders personally; its share-related terms bind the company only when mirrored into the articles of association.
2. What’s the difference between a co-founder agreement and a shareholders’ agreement?
A co-founder agreement is signed early, between the founders, and governs the founder relationship (equity, vesting, roles, IP, exit). A shareholders’ agreement comes later, usually at the first funding round, and governs all shareholders including investors. The co-founder agreement is the foundation; the SHA builds on it and often supersedes parts of it.
3. When should we sign the co-founder agreement, before or after incorporation?
Ideally before or at incorporation, while the equity is being allotted and the AoA is being drafted, so the vesting and transfer terms can be built into the articles from day one. If you’ve already incorporated without one, sign it now and amend the AoA to match. The cost of signing late is having to renegotiate once the stakes are real.
4. Do we need a co-founder agreement if we’re equal 50-50 partners?
Especially then. A 50-50 split with no agreement is the classic deadlock setup, with no way to break a tie and no vesting if one of you leaves. The agreement is what adds vesting, a leaver clause, and a deadlock mechanism. Equal ownership makes those clauses more necessary, not less.
5. Can a co-founder agreement override the company’s articles of association?
No. Where a co-founder agreement (or SHA) conflicts with the AoA, the AoA prevails as far as the company is concerned, and a share-transfer restriction agreed only privately doesn’t bind the company. That’s the rule from V.B. Rangaraj v. V.B. Gopalakrishnan. The practical answer is to mirror the agreement’s share terms into the AoA so they align.
6. What is founder vesting and is it legal in India?
Vesting ties a founder’s equity to their continued involvement, so unvested shares can be bought back at a nominal price if the founder leaves early. It’s entirely legal in India, usually structured as a buy-back right over already-issued founder shares (since Indian founder shares are typically allotted in full at incorporation). The standard schedule is four years with a one-year cliff.
7. What’s the difference between a good leaver and a bad leaver?
A good leaver departs for reasons outside their fault (death, disability, removal without cause) and is generally treated more favourably on price, often keeping vested shares and being bought out of unvested ones at fair value. A bad leaver resigns early, is terminated for cause, or leaves to compete, and is bought out at the lower of cost or fair market value, sometimes losing vested equity too. The agreement should define both precisely.
8. Is a founder non-compete enforceable in India after the founder exits?
Almost never. Section 27 of the Indian Contract Act voids agreements in restraint of trade, and Indian courts (in Krishan Murgai and Percept v. Zaheer Khan) have held post-exit non-competes void. A non-compete that operates only while a founder is still inside the company is valid; one that bites after exit is not. Protect yourself post-exit through confidentiality, non-solicit, IP assignment, and bad-leaver equity forfeiture instead.
9. Who owns the intellectual property created before the company was incorporated?
The founder who created it, personally, unless it’s assigned to the company in writing. Under Section 17 of the Copyright Act, 1957 the author is the first owner, and the employment exception doesn’t help for work made before any company existed to employ them. That’s why the IP assignment clause, transferring pre-incorporation IP to the company, is essential.
10. How should equity be split between co-founders?
Deliberately, and weighted by what each founder actually brings: full-time commitment, capital, domain expertise, IP, and role risk. Equal splits feel fair but often age badly because contributions diverge. Whatever ratio you choose, pair it with vesting and write down the reasoning behind the numbers.
11. What is sweat equity and how is it issued?
Sweat equity is shares issued to a director or employee for non-cash consideration, such as know-how or IP, under Section 54 of the Companies Act, 2013. It requires a special resolution and must respect the ceilings in the Companies (Share Capital and Debentures) Rules, 2014, with a more generous lifetime ceiling for DPIIT-recognised startups. For most founding teams, allotting founder shares at face value and governing them with vesting is simpler than running a sweat-equity issuance.
12. What happens if co-founders deadlock on a decision?
Whatever your deadlock clause says, which is exactly why you need one. Common mechanisms are a cooling-off period and discussion, mediation, a casting vote for defined matters, or a buy-sell where one founder names a price and the other chooses to buy or sell at it. Without a deadlock clause, a 50-50 disagreement can freeze the company until a court intervenes.
13. Does a co-founder agreement need to be registered or stamped?
It must be stamped: pay the stamp duty applicable in your state (modest, and it varies state to state) so the agreement is admissible in evidence. Registration isn’t required unless the agreement transfers immovable property. Notarisation is optional but adds proof of execution.
14. What happens if one co-founder leaves early?
The leaver clause decides. With vesting in place, the company or remaining founders buy back the unvested shares at a nominal price, and the departing founder keeps only what’s vested (treated as a good or bad leaver on price). Without vesting, the founder keeps everything, which is exactly the outcome the agreement exists to prevent.
15. Can we write our own co-founder agreement, or do we need a lawyer?
You can draft from a template to align your thinking and save legal time, and the template in this guide is built for that. But have a lawyer review it before signing, because the clauses that cause the most damage when wrong (vesting, IP assignment, AoA mirroring, the void non-compete trap) are exactly the ones a generic template tends to get wrong for India. The review cost is trivial next to a founder dispute.
16. I’m a single founder. Do I still need a co-founder agreement?
Not while you’re solo, by definition. But the moment you bring on a co-founder, or even a very early equity-holding team member, you need one signed before they receive equity. Founders who add a partner on a handshake and “sort the paperwork later” are the ones who end up in the disputes this document is designed to prevent.
References
Last verified: 2026-06-18
Case Law
- Niranjan Shankar Golikari v. The Century Spinning and Mfg. Co. Ltd., AIR 1967 SC 1098. Supreme Court of India, Shelat and Bachawat, JJ., judgment dated 17 January 1967. Authority that a negative covenant operating during the term of a contract of service is not a restraint of trade barred by Section 27.
- Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan, (2006) 4 SCC 227. Supreme Court of India, judgment dated 22 March 2006. Authority that a restrictive covenant extending beyond the term of the contract is a restraint of trade and void under Section 27.
- Superintendence Company of India (P) Ltd. v. Krishan Murgai, (1981) 2 SCC 246. AIR 1980 SC 1717; Supreme Court of India, judgment dated 9 May 1980. Authority that a post-service non-compete covenant in restraint of trade is void.
- V.B. Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160. AIR 1992 SC 453; Supreme Court of India, judgment dated 28 November 1991. Authority that a share-transfer restriction agreed between shareholders is not binding on the company unless incorporated into the articles of association.
Statutes
- Indian Contract Act, 1872, Section 10: what agreements are contracts (free consent, lawful consideration, competent parties, lawful object).
- Indian Contract Act, 1872, Section 27: agreements in restraint of trade are void, subject to the sale-of-goodwill exception.
- Copyright Act, 1957, Section 17: the author is the first owner of copyright, subject to the contract-of-service and other exceptions.
- Companies Act, 2013, Section 54: issue of sweat equity shares (read with Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014).
- Companies Act, 2013, Section 58: refusal of registration and validity of share-transfer restrictions in a private company’s articles.
- Arbitration and Conciliation Act, 1996: governs arbitration of founder disputes where the agreement provides for it.
Legal disclaimer
This article is published for informational and educational purposes. It does not constitute legal advice and should not be relied upon as a substitute for consultation with a qualified advocate or company secretary on the specific facts of any startup. Drafting a co-founder agreement involves contract, company-law, intellectual-property, and tax considerations that depend on the founding team, the business, the stage, and the eventual funding structure. The template in this article is a starting structure, not a finished contract, and should be reviewed and adapted by qualified counsel before execution. Readers are advised to consult a qualified professional before acting on the information here. iPleaders, its authors, and LawSikho assume no liability for any loss or damage arising from reliance on this content.
