Founders Agreement in India (2026) — Equity, Vesting, Leaver Provisions, IP Assignment

Q: Is a non-compete clause against a co-founder enforceable in India?

Section 27 of the Indian Contract Act, 1872 declares agreements in restraint of trade void, with narrow exceptions. Broad non-competes (such as a five-year bar across all of India) are unenforceable. What courts have upheld is narrower: non-competes limited in time (typically one to two years), limited in geography, limited to a defined business line, and tied to the protection of specific confidential information or a legitimate business interest. Non-solicit clauses are generally more enforceable than non-competes.

Most Indian startups write their first Founders Agreement in a weekend, often with a template a friend emailed them. The document sits in a Google Drive folder and gets ignored for the next three years. When it finally becomes relevant — a co-founder leaves, an investor asks for cap-table hygiene, a dispute surfaces — the document is almost always inadequate. Either it was never signed, or it was signed but says nothing about leaver treatment, or it says things that are unenforceable under Indian law.

This page explains what a Founders Agreement does under Indian law, which clauses matter, and the specific traps that catch Indian founders. The content is informational. For the drafting that fits a specific company and specific people, independent legal advice remains necessary.

The legal foundation

A Founders Agreement is a contract. It is governed by the Indian Contract Act, 1872. Under Section 10 of the Act, the document is enforceable where there is free consent, lawful consideration, competent parties and a lawful object. The mutual promises exchanged between founders — equity in return for service and intellectual property contribution — satisfy the consideration requirement.

Where the company has already been incorporated, parts of the Founders Agreement overlap with the Shareholders' Agreement (SHA), the Articles of Association (AoA) and the resolutions of the Board. Best practice at seed stage is to execute the Founders Agreement first, then roll the relevant provisions into the SHA and the AoA at the first external round. The two documents work together; they do not replace each other.

The clauses that actually matter

1. Equity split

The single most important number in the document. Equity split is not a reflection of past contribution so much as a reflection of future commitment and future value creation. Equal splits are common. They are also the most frequent source of later deadlock. A 60/40 or 55/45 split with a specified tie-breaker is often more honest, provided the founders can have the conversation without taking offence.

The equity split must be stated as a specific percentage, backed by a specific number of shares, cross-referenced to the cap table at execution. "Approximately equal" is not a term that survives contact with a Term Sheet.

2. Vesting with a cliff

Market standard in Indian startups is four years of vesting with a one-year cliff. The structure:

No equity vests during the first twelve months of full-time service.
On the first anniversary, 25 per cent of the allocated shares vest.
The remaining 75 per cent vests on a monthly or quarterly basis over the next 36 months.

A founder who exits before the cliff loses all allocated equity. A founder who exits after the cliff keeps the portion already vested.

3. Reverse vesting — the Indian-law wrinkle

In US startups, founders are "granted" shares that vest over time. In Indian private limited companies, shares are issued at formation and the full issued share capital sits with the founders immediately. Vesting has to be imposed in the opposite direction: a founder who exits early is required to transfer unvested shares back to the company or the remaining founders, usually at the original subscription price.

This is called reverse vesting. The mechanics are:

All issued shares are allotted to founders at formation.
The Founders Agreement imposes a repurchase right in favour of the company (or the remaining founders) over a defined pool of each founder's shares.
As time passes and the vesting schedule progresses, the repurchase right lapses in proportion.
A founder exiting before full vesting triggers the repurchase at the agreed price, typically the subscription price, which is nominal.

Without a reverse vesting clause, a co-founder who quits in month six walks away with their full issued shareholding, undiluted by their departure. That is a cap-table disaster that investor diligence will catch and that no later document can clean up without the departed founder's cooperation.

4. Leaver treatment — good vs bad

Vesting handles the share quantum. Leaver treatment handles the price. The standard framework:

Good leaver — death, permanent disability, critical illness, or departure approved by the Board. Vested shares are retained by the leaver or repurchased at fair market value. Unvested shares are forfeited at nominal value.
Bad leaver — fraud, gross misconduct, criminal breach of trust, or voluntary breach of material terms. All shares, vested and unvested, become repurchasable at nominal value, or at the lower of nominal and fair market value.

The Founders Agreement should define each category with as much specificity as possible, including which body decides whether a departure is good or bad. The Board of the company, with the departing founder recused, is the usual answer. A dispute-resolution escalation route should sit behind that in case the recused founder challenges the finding.

5. IP assignment — the clause nobody signs cleanly

Every founder brings prior work: code, decks, product mockups, half-written patent drafts. The Founders Agreement must address two things:

Pre-existing IP. Each founder lists the IP they bring in. Some is contributed to the company. Some is retained and licensed to the company on terms. The list, however short, must exist in writing. "Everything I have ever written" is not a usable assignment.
Future IP. All IP created by the founders during their service and in the scope of the company's business is assigned to the company. The assignment should be present-tense ("hereby assigns") rather than future-tense ("will assign"), because Indian courts have historically treated promises to assign as weaker than present assignments.

A missing or badly drafted IP clause is the single most common finding in startup due diligence. It is also the one that cannot be retro-fitted without the departed founder's cooperation.

6. Roles, responsibilities and time commitment

The agreement should state who does what, with enough specificity to be meaningful but not so much that routine role changes require amendment. CEO, CTO, CPO, Head of X. Reporting lines. Time commitment ("full-time"), and what full-time means in operational terms.

7. Decision-making and deadlock

Which decisions require unanimity, which require majority, which are reserved to the CEO. The usual carve-out list for unanimity includes: issuance of new shares, raising external debt, change in business model, exit, winding up, hiring at CXO level, and amendment of the Founders Agreement itself. Everything else runs on simple majority or on the CEO's call.

A deadlock-resolution mechanism matters more than anyone acknowledges at execution. Options include an agreed external mediator, a casting vote arrangement, or a shoot-out buy-out clause. Something in writing is better than the fiction that two 50/50 founders will always agree.

8. Non-compete and non-solicit — the Section 27 trap

Section 27 of the Indian Contract Act, 1872 declares any agreement in restraint of trade void, except where it fits a specific statutory or judicial carve-out. A non-compete that bars a founder from "working in the same industry for five years anywhere in India" will not be enforced by an Indian court.

What courts have upheld is narrower: non-competes that are limited in time (typically one to two years), limited in geography (a defined city, state or market), limited to a defined business line, and tied to the protection of specific confidential information or a legitimate business interest. Non-solicit clauses — barring the departing founder from poaching employees or customers for a defined period — are generally more enforceable than non-competes.

Drafting a non-compete that is both useful and enforceable is a judgment call. Many well-advised Indian Founders Agreements focus the restrictive covenants on confidentiality and non-solicit, and treat the non-compete as a bonus rather than a load-bearing clause.

9. Confidentiality

A standalone confidentiality clause that survives departure. Scope, duration (indefinite for trade secrets, three to five years for business information), carve-outs for information in the public domain or independently developed. Nothing novel; the omission is more common than a badly drafted version.

10. Dispute resolution

Arbitration under the Arbitration and Conciliation Act, 1996, seated in a specific city, with a defined number of arbitrators and an institutional appointment mechanism. Litigation in court as the fallback. The clause should also address interim relief — Section 9 of the Act allows court applications for interim measures, which founders will need the moment a serious dispute surfaces.

11. Exit, drag and tag

At the Founders Agreement stage this is a lighter touch than at the SHA stage. The basics: how a founder may transfer shares (usually only to the company or other founders without consent), what rights of first refusal exist, and what happens on a change of control. The heavy lifting on drag and tag typically moves into the SHA at the first external round.

Who should sign and when

The Founders Agreement should be signed before any serious joint work, and ideally before the company is incorporated. Signing after incorporation is still useful but creates sequencing complexity — reverse vesting mechanics must be reconciled with the already-issued shares, and some provisions overlap with the AoA and SHA.

In practice, the sequence most Indian startups actually follow is: handshake conversations → company incorporation → equity issued → "we should get a Founders Agreement done" → agreement signed six months later. That is suboptimal but survivable. What is not survivable is entering a Term Sheet discussion with no Founders Agreement at all.

Common mistakes

No written document, only verbal understandings.
A template downloaded from the internet, with US vesting language and no reverse vesting adaptation.
Equal equity splits with no deadlock mechanism.
Future-tense IP assignment ("will assign") instead of present ("hereby assigns").
A sweeping non-compete that any Indian lawyer will tell you is unenforceable.
No definition of what makes a departure a bad leaver versus a good leaver.
Signing before incorporation and then forgetting to re-execute at the company level after shares are issued.

Frequently asked questions

Yes. A Founders Agreement is enforceable as a contract under the Indian Contract Act, 1872. It must meet the Section 10 requirements of free consent, lawful consideration, competent parties and a lawful object. The mutual promises between founders — equity in return for service and intellectual property contribution — serve as valid consideration.

Ideally before any serious work is done jointly, and before the company is incorporated. Signing after incorporation is still useful but creates sequencing complexity. The one scenario that is not survivable is entering a Term Sheet discussion with no Founders Agreement at all.

Section 27 of the Indian Contract Act, 1872 voids agreements in restraint of trade with narrow exceptions. Broad non-competes are unenforceable. What courts have upheld is narrower: non-competes limited in time (typically one to two years), limited in geography, limited to a defined business line, and tied to a specific legitimate business interest. Non-solicit clauses are generally more enforceable than non-competes.

In Indian private limited companies, shares are issued at formation rather than granted over time. Reverse vesting is implemented contractually — a founder who exits before a defined period (typically four years with a one-year cliff) is required to transfer unvested shares back to the company or the remaining founders at the original subscription price. Without reverse vesting, a co-founder who quits in month six keeps their full issued shareholding.

A good leaver typically includes departure due to death, permanent disability, critical illness, or mutual Board-approved exit — vested shares are retained or repurchased at fair market value and unvested shares are forfeited at nominal value. A bad leaver covers fraud, gross misconduct, criminal breach of trust or voluntary breach of material terms — all shares become repurchasable at nominal value, or at the lower of nominal and fair market value.

Founders Agreement in India — the clauses that matter and the ones that catch founders out.