Contributed By: Vinay Yerubandi
Email: vinay@simplybiz.in

15 Clauses Every Founders’ Agreement Should Include for Indian Startups

A well-crafted founders’ agreement is the backbone of any startup. As experts note, relying on “handshakes and honour-codes” without formalising co-founder roles leads to disputes. In India’s booming startup scene, a written founders’ agreement clarifies ownership, duties, and conflict resolution, protecting founders and investors alike. Below are 15 essential clauses that every Indian startup founder’s agreement should include, followed by common pitfalls to avoid.

1. Equity Distribution and Vesting Schedule

What it is: This clause sets out the percentage of ownership (shares) each founder holds and the vesting terms for those shares. In practice, founders often assign equity based on their contribution (idea, capital, work) and set vesting schedules to ensure long-term commitment. For example, a typical vesting schedule might be four years with a one-year cliff, meaning that no shares vest if a founder leaves before the one-year mark.
Why it matters: Clear equity splits avoid future disputes over ownership and reward founders for staying involved. A vesting schedule prevents “free-riding” by requiring founders to earn their shares over time. In India, this also aligns with investor expectations; early-stage investors routinely ask for vesting provisions to protect their investment.

2. Founder Roles and Responsibilities

What it is: This clause enumerates each co-founder’s duties, such as CEO handling business development, CTO overseeing technology, etc. It may also include general commitments (e.g. full-time work) and decision‐making scope.
Why it matters: Explicit roles prevent confusion and overlapping efforts. By spelling out who does what, founders set expectations and accountability (e.g. one founder “runs the company” while others may be “silent partners”).

3. Founder Time Commitment and Dedication

What it is: A clause clarifying each founder’s expected time and effort (full time, part time, other engagements) and any exclusivity requirements.
Why it matters: Founders’ energy levels vary; one may work full-time while another keeps a side gig. Without a clear agreement on commitment, resentment can build. For instance, a full-time founder can feel shortchanged if a co-founder is only nominally involved. This clause might set minimum hours or prohibit certain outside activities. In practice, startups tailor this clause to their situation.

4. Decision-Making and Governance (Board and Voting)

What it is: This clause lays out how major business decisions are made: Board composition, voting rights, quorum, and especially any reserved matters requiring special approval (like a super-majority or all-founders consent).
Why it matters: In a co-founder setup, disputes often arise from “who decides what.” A decision-rights clause pre sets the process (e.g. majority vote, unanimous consent for key moves). Many agreements include reserved matters that require all or most founders’ sign-off. Structuring this clause upfront avoids gridlock or takeover by one co-founder.

5. Founder Compensation and Remuneration

What it is: This clause states how founders will be paid: salaries, reimbursements, benefits or other compensation.
Why it matters: Early startups sometimes start with no salaries, but as cash flows come in, disagreements can arise. Explicitly fixing salaries (or tying them to benchmarks/approval) keeps everyone on the same page. Under Indian law, salary payments by a company must follow payroll and tax regulations, and if a founder is also a director, certain remuneration limits (Section 197 of Companies Act) may apply. By clarifying pay early, founders avoid future misunderstandings and ensure legal compliance.

6. Intellectual Property (IP) Rights and Assignment

What it is: This clause assigns ownership of all startup-related IP (patents, trademarks, copyrights, trade secrets) to the company, and outlines how future IP is handled.
Why it matters: For tech and creative startups, IP is the critical asset. The founders’ agreement must ensure that all inventions and work done by founders belong to the company, not to individuals. It should cover existing IP (e.g. code or designs founders brought in) and future creations. In India, various statutes govern IP rights (Indian Copyright Act, Patents Act, Trade Marks Act, etc.), so founders should confirm in writing that they assign any relevant rights to the company. A clear IP clause avoids disputes over who owns the startup’s core ideas.

7. Confidentiality and Non-Disclosure (NDA)

What it is: A clause obligating founders to keep the company’s sensitive information confidential, both during and after their involvement.
Why it matters: Startups rely on secret plans, client lists, prototypes, etc. A confidentiality clause (often integrated into the founders’ agreement) protects this information. Although Indian law does not enforce trade secrets through a specific statute, breach of NDA can be remedied under contract law or the Specific Relief Act (injunctions). Typically, the clause enumerates examples (financial data, software code, strategy) and says disclosure is only allowed under law. By building secrecy obligations into the founders’ pact, startups preserve their competitive edge.

8. Non-Compete and Non-Solicitation

What it is: This clause restricts founders (especially upon exit) from starting/joining competing businesses or poaching each other’s employees/customers for a limited period.
Why it matters: Founders hold deep knowledge. A reasonable post-exit non-compete (e.g. 1–2 years, limited to similar ventures in the same geography) can prevent immediate competition. However, under Article 19(1)(g) of the Constitution and Section 27 of the Indian Contract Act, 1872, any agreement in restraint of trade is generally void. In practice, purely non-compete covenants are often unenforceable unless very narrowly tailored. Many startups instead focus on strong non-solicitation (no luring customers or key staff) and enforceable clauses like confidentiality. Still, a founders’ agreement can include a limited non-compete with a clear scope and duration, knowing courts will scrutinise it closely. Founders should consult legal professionals to craft a clause that deters competition without falling foul of Section 27.

9. Share Transfer Restrictions and Lock-In

What it is: Clauses that restrict a founder’s ability to sell or transfer their shares, often requiring co-founder or company consent, or imposing a mandatory lock-in period (e.g. X years after founding).
Why it matters: This prevents a founder from prematurely cashing out or diluting others. For example, many agreements include a lock-in (shares can’t be sold for an agreed period) or a requirement to offer shares to other founders/company first (right of first refusal/offer). The Indian Companies Act allows private companies to restrict share transfers by contract or Articles, so such restrictions are enforceable. An early co-founder leaving the company should not quietly sell shares to outsiders without notice. A typical provision might say any sale is void unless pre-approved by all founders (in line with Contract Act freedom to contract and Companies Act norms on share transfers). By writing in transfer and lock-in terms upfront, startups ensure that equity changes only happen under agreed conditions.

10. Right of First Refusal (ROFR) / Right of First Offer (ROFO)

What it is: A clause giving remaining founders (or the company) the first chance to buy a founder’s shares before they’re sold to outsiders. In a ROFR, a departing founder must first offer shares on the same terms of any external offer; in a ROFO, they must propose a sale to insiders at a pre-agreed price or formula before offering to third parties.
Why it matters: ROFR/ROFO clauses keep share sales in the founding circle and protect co-founders from unwanted shareholders. The founders’ agreement (often acting as an interim shareholders’ agreement) can impose these rights as soon as the company starts. As noted in a founders’ primer, investors and founders typically insert ROFO/ROFR in early agreements. For example, if Founder A wants to sell, Founder B gets first dibs to match the offer. Under company law, these rights are contractually binding on the founders and compatible with Articles. A ROFR/ROFO ensures stability: existing founders can maintain inter se control and orderly exits.

11. Tag-Along Rights (Co-Sale Rights)

What it is: A clause allowing minority founders to “tag along” (join in) if a majority founder sells their shares. In effect, if Founder A sells to an outsider, Founder B can sell a proportional share on the same terms.
Why it matters: This protects minorities from being left behind or disadvantaged in a sale. If a big founder finds a buyer, a tag-along lets smaller founders exit on equal footing. In legal terms, tag-along is a contractual right (not a statutory right) typically included so that every founder can participate in any sale. It’s especially important once external investors come in; but even among founders, it avoids scenarios where a majority sells out and the others can’t exit with it.

12. Drag-Along Rights

What it is: A clause forcing minority founders to join a sale if a specified majority agrees to sell (e.g. if 75% of shareholders approve, the rest must sell on the same terms).
Why it matters: Drag-along ensures that majority owners can execute an exit without holdouts blocking the deal. For instance, if investors and a lead founder agree to sell the startup, a drag-along clause compels remaining founders to sell their shares too, preventing one reluctant founder from scuppering the exit. Like tag-along, drag-along is a contractual mechanism protecting the majority’s exit strategy. It balances power: tag-along protects minorities, drag-along protects majority sellers.

13. Founder Exit and Buy-Sell (Sale) Clause

What it is: This clause outlines how a founder may exit (voluntarily or otherwise) and what happens to their shares or responsibilities. It often includes notice periods, share buyback terms, valuation methods, and any penalties.
Why it matters: Startups must plan for departures early. The founders’ agreement should specify how an exiting founder’s equity is handled to avoid disputes. For example, it may allow the company or remaining founders to buy back the departing founder’s shares (commonly at a pre-agreed valuation or formula). It should also address notice requirements and transition duties. Legally, this may involve share transfer provisions under the Companies Act (Sec. 68 on buyback or Sec. 62 on issue of shares), so compliance is key.

14. Good Leaver / Bad Leaver Clauses

What it is: These clauses classify an exiting founder as a “good leaver” or “bad leaver” and set different outcomes for each. Typically, a good leaver (resignation on good terms, retirement, etc.) might get market value for their shares (or accelerated vesting), while a bad leaver (terminated for cause, breach of agreement) might be forced to sell shares back at a discount.
Why it matters: Not all exits are equal. By defining good vs bad leaver, founders encourage the right behaviour. For example, a good leaver might keep the value of their vested shares or even gain accelerated vesting, whereas a bad leaver might lose unvested shares and have to forfeit or sell remaining shares cheaply. In India, such clauses are upheld as contractual terms, but the specifics (what constitutes “cause”, discounts, etc.) should be clear to avoid legal challenges. Including good/bad leaver definitions ensures fairness and discourages founders from abandoning the startup irresponsibly.

15. Shareholder (Board) Removal and Founder Termination

What it is: This clause sets conditions for removing a founder from their role or as a shareholder/Director, and the consequences (e.g. share forfeiture or buy-back).
Why it matters: If a founder fails in their duties or engages in misconduct, the company needs recourse. The agreement can permit removal of a founder-director by Board or shareholder vote under pre-defined conditions (consistent with Companies Act removal rules) and can require them to sell shares. For example, termination “for cause” might trigger an obligation to forfeit unvested shares or to sell held shares at a pre-agreed price. Conversely, resignation or retirement (with no fault) could allow a founder to keep vested shares. This ties into the good/bad leaver framework. A clear removal clause gives the team a way to act if a founder is inactive or harmful. Under the Companies Act, directors can be removed by ordinary resolution (Section 169), but the founders’ pact can streamline mutual agreement for such actions.

Conclusion

A well-drafted founders’ agreement is not just paperwork – it’s a startup’s safety net. By covering all critical clauses above (and tailoring them to your business), founders prevent future deadlock and protect everyone’s interests. Given the legal nuances in India (from the Contract Act to the Companies Act), professional guidance is invaluable. SimplyBiz specialises in crafting startup-friendly founders’ agreements and ensuring full compliance with Indian law. Don’t leave your venture’s foundation to chance: consult SimplyBiz for a customised agreement and compliance support that will help your startup grow smoothly and securely.

If you are looking for professional assistance in share issuance, share transfers, stamp duty payments, fundraising transactions or end-to-end compliance management for your company, SimplyBiz offers comprehensive solutions covering all stages of the entity life cycle. To know more or to outsource your compliance requirements, please write to Shilpa Agarwal at shilpa@simplybiz.in.