What Should Be Included in a Founder Agreement by Startups

Why Most Startup Failures Begin Before the Product Even Launches

Two brilliant engineers meet at an IIT reunion. They have a revolutionary idea for an AI-powered fintech product. Excitement is high. They shake hands, split equity 50-50, and dive headfirst into building their startup.

Fast forward 18 months: The product is gaining traction. One founder wants to pivot the business model. The other disagrees. One founder feels they’re working 80 hours a week while the other barely contributes 20. Disagreements escalate. There’s no written agreement to refer to. No clarity on decision-making authority. No exit mechanism. The startup implodes. Not because the product failed. Not because they couldn’t raise funding. But because the founders never bothered to document their relationship properly through Founder Agreement.

This story repeats itself thousands of times across India’s startup ecosystem. According to various studies, poor founder relationships are among the top three reasons startups fail, often ranking even higher than lack of funding or market fit.

The tragedy? Most of these failures are completely preventable with one simple document: a Founder Agreement (also called a Co-Founder Agreement or Founders’ Agreement).

Yet, surprisingly few Indian startups create one. Founders rely on verbal understandings, handshake deals, or WhatsApp messages, treating the most critical business relationship like a casual arrangement. When things go wrong (and they often do), there’s nothing to fall back on except expensive legal battles and destroyed relationships.

This comprehensive guide will walk you through everything that should be included in a founder agreement for Indian startups. Whether you’re just starting out or have been operating for months without proper documentation, this article will help you understand why founder agreements matter and what essential clauses they must contain.

Let’s build the legal foundation your startup deserves.

What Is a Founder Agreement and Why Do You Need One?

A founder agreement is a legally binding contract between the co-founders of a startup that clearly defines:

• Who owns what percentage of the company
• What roles and responsibilities each founder has
• How decisions will be made
• What happens if a founder wants to leave or is forced out
• How disputes will be resolved
• How intellectual property will be handled

Why Indian Startups Need Founder Agreements

1. Prevents Future Disputes: When everything is documented in writing, there’s no room for “I thought we agreed on…” or “You promised me…”

2. Protects Equity Distribution: Clear vesting schedules ensure founders earn their equity over time, preventing situations where someone takes 40% equity and leaves after three months.

3. Enables Investment: Serious investors (VCs, angel investors) always ask for founder agreements. Not having one is a red flag that suggests poor governance.

4. Establishes Decision-Making Authority: Defines who makes which decisions, preventing paralysis or constant conflicts.

5. Safeguards Intellectual Property: Ensures that all IP created by founders belongs to the company, not individuals.

6. Provides Exit Mechanisms: Creates clear processes for founders who want to leave, get removed, or buy out others.

7. Maintains Operational Clarity: Documents roles, responsibilities, salaries, and time commitments.

The Cost of Not Having One

Without a founder agreement:

• Equity disputes can tear apart promising startups
• Courts may impose solutions you don’t want
• Investors may refuse to fund your startup
• Departing founders might take IP or clients with them
• Legal battles can drain resources and time
• The company’s reputation suffers

The question isn’t whether you can afford to create a founder agreement. It’s whether you can afford NOT to.

Essential Clauses in a Founder Agreement for Indian Startups

Let’s break down the critical components your founder agreement must include:

1. Equity Ownership and Distribution

This is the most critical section. Clearly specify:

Initial Equity Split: Exact percentage ownership for each founder

• Example: “Founder A shall hold 40% equity, Founder B shall hold 35% equity, and Founder C shall hold 25% equity in the Company.”

Basis for Equity Distribution: Document why equity was split this way

• Based on initial capital contribution
• Relative experience and expertise
• Time commitment and responsibilities
• Strategic value and network

Future Dilution: How equity will be adjusted when:

• New funding rounds occur
• Additional founders join
• ESOP (Employee Stock Option Plans) are created

Why it matters: Equity is often the primary compensation for startup founders. Ambiguity here causes massive conflicts. Document not just the numbers, but the reasoning behind them.

2. Vesting Schedule and Cliff Period

Vesting ensures founders earn their equity over time rather than owning it outright from day one.

Standard Vesting Terms:

• 4-year vesting period: Equity is earned gradually over 4 years
• 1-year cliff: No equity vests until the founder completes one year. After the cliff, 25% vests immediately, then monthly or quarterly vesting thereafter
• Acceleration clauses: What happens to unvested equity if the company is acquired or if certain milestones are achieved

Example Clause: “Each Founder’s equity shall vest over a period of 48 months with a 12-month cliff. Upon completion of 12 months of active involvement, 25% of the allocated equity shall vest immediately, with the remaining equity vesting monthly thereafter at the rate of 1/48th per month.”

Why it matters: Vesting prevents the nightmare scenario where a co-founder takes 30% equity, contributes for three months, leaves, and walks away with significant ownership. Vesting aligns long-term commitment with equity ownership.

3. Roles, Responsibilities, and Titles

Define each founder’s role with clarity:

Designation: CEO, CTO, CFO, COO, etc.

Primary Responsibilities: Specific functional areas each founder manages

• Founder A: Product development, technology stack, engineering team
• Founder B: Business development, sales, fundraising
• Founder C: Operations, finance, legal compliance

Reporting Structure: Who reports to whom (if hierarchical)

Time Commitment: Full-time, part-time, or advisory

• Specify minimum hours per week expected
• Clarify whether founders can have other jobs or commitments

Why it matters: Clear role definition prevents overlap, gaps in responsibility, and the “that’s not my job” problem. It also establishes accountability.

4. Decision-Making Authority and Voting Rights

Establish how decisions will be made:

Day-to-Day Decisions: Operational decisions within each founder’s area of responsibility can be made independently

Major Decisions Requiring Unanimous Consent:

• Changing the business model or pivoting
• Raising funding or taking on debt
• Adding or removing founders
• Selling the company or significant assets
• Changing equity structure
• Entering into contracts above a certain threshold (e.g., ₹10 lakhs)

Majority Decisions: Requiring agreement from founders holding more than 50% equity

• Hiring senior leadership
• Annual budgets and financial plans
• Opening new offices or locations
• Strategic partnerships

Deadlock Resolution: What happens when founders can’t agree

• Mediation by a neutral third party
• Voting rights of investors or board members
• Buy-sell provisions

Why it matters: Without clear decision-making authority, startups face paralysis or constant conflict. This section prevents “founder gridlock.”

5. Intellectual Property Assignment

This clause is absolutely critical and often overlooked:

IP Ownership: All intellectual property created by any founder, before, during, or related to the startup, belongs to the company, not the individual

Prior IP Disclosure: Founders must disclose any IP they created before the startup that might be used in the business

Confidentiality: Founders agree to keep company information confidential

Non-Compete During Tenure: While working on the startup, founders won’t work on competing ventures

Example Clause: “Each Founder hereby assigns to the Company all right, title, and interest in any and all intellectual property, including but not limited to patents, copyrights, trademarks, trade secrets, code, designs, and innovations, created in relation to the Company’s business. All such IP shall be deemed ‘work made for hire’ and shall vest in the Company upon creation.”

Why it matters: Without clear IP assignment, a departing founder could claim they own the code they wrote, the design they created, or the business method they developed, potentially destroying the company.

6. Founder Salaries and Compensation

Be transparent about financial arrangements:

Initial Salary: What (if any) salary each founder will draw

• Many early-stage startups start with zero or minimal salaries
• Specify when salaries will begin

Salary Revision: How and when salaries will be reviewed and adjusted

• Tied to funding milestones
• Based on company revenue
• Annual review process

Expense Reimbursement: Clear policy on business expenses

• What expenses are reimbursable
• Approval process and limits
• Documentation requirements

Deferred Compensation: If founders aren’t taking salaries initially, document:

• Whether unpaid salaries will be deferred or forgone
• If deferred, when and how they’ll be paid

Why it matters: Money matters cause tension. Being upfront about compensation, even when it’s minimal, prevents resentment and ensures everyone has aligned expectations.

7. Founder Exit and Termination Provisions

This is where many founder agreements fail. You must address:

Voluntary Exit: What happens if a founder wants to leave

• Notice period required (typically 3-6 months)
• Treatment of vested vs. unvested equity
• Buyback rights of remaining founders
• Non-compete and non-solicitation obligations

Involuntary Removal: Grounds for forcing a founder out

• Gross misconduct or illegal activity
• Prolonged non-performance
• Breach of fiduciary duties
• Violation of agreement terms

Good Leaver vs. Bad Leaver Provisions:

Good Leaver (voluntary exit with proper notice, or exit due to health/family reasons):

• Retains all vested equity
• Company has option to buy back at fair market value
• Reasonable non-compete period (6-12 months)

Bad Leaver (terminated for cause, violation of agreement, or abandonment):

• May forfeit some or all equity
• Company can buy back at nominal value or original price
• Longer non-compete period (12-24 months)

Death or Disability: How equity is handled if a founder becomes incapacitated or passes away

• Whether equity continues vesting
• Rights of heirs or estate
• Insurance considerations

8. Non-Compete and Non-Solicitation Clauses

Protect the business from founder conflicts of interest:

Non-Compete During Employment: Founders cannot work on competing businesses while actively involved with the startup

Post-Exit Non-Compete: After leaving, founders cannot start or join competing ventures for a specified period

• Typically 12-24 months depending on circumstances
• Must be reasonable in scope and geography to be enforceable. Unjustified restriction wont be enforceable by courts.

Non-Solicitation: Departing founders cannot:

• Recruit employees or contractors from the company
• Solicit customers or clients
• Misappropriate business opportunities

Exceptions: Non-compete clauses must be reasonable

• Should not prevent founders from earning a livelihood
• Should be limited in duration and geographic scope
• Indian courts tend to scrutinize overly broad non-compete clauses

Why it matters: You don’t want a departing founder immediately launching a competing startup using knowledge, relationships, and insights gained from your company.

9. Confidentiality and Data Protection

Given India’s Digital Personal Data Protection Act, 2023:

Confidential Information: Define what constitutes confidential business information

Obligations: Founders must:

• Keep all business information confidential during and after their tenure
• Not disclose to third parties without authorization
• Return all confidential materials upon exit

Data Protection Compliance: Founders agree to comply with DPDP Act and other applicable privacy laws

Why it matters: Protecting sensitive business information, customer data, and strategic plans is essential for competitive advantage.

10. Funding and Capital Contributions

Address financial commitments:

Initial Capital: What (if any) money each founder is investing

• Amount and timeline
• Whether it’s a loan to the company or equity investment

Future Capital Requirements: How additional funding needs will be handled

• Right of first refusal for existing founders
• Consequences if a founder can’t participate in future rounds

Bootstrapping vs. Fundraising: Strategy for financing the startup

Why it matters: Financial contributions create expectations. Document them to prevent “I put in more money than you” arguments.

Common Mistakes to Avoid in Founder Agreements

Even when startups create founder agreements, they often make critical errors:

1. Using Generic Templates Without Customization

Every startup is unique. Copy-pasting a template without adapting it to your specific situation creates ambiguity and loopholes.

2. Equal Equity Split Without Justification

The “let’s just split it equally” approach often breeds resentment when contribution levels diverge. Base equity on actual value creation, not fairness.

3. No Vesting Schedule

Giving founders full equity upfront is recipe for disaster. Always include vesting with at least a 1-year cliff.

4. Vague Role Definitions

“Founder A handles tech stuff” isn’t enough. Be specific about responsibilities, decision-making authority, and expectations.

5. Ignoring IP Assignment

Assuming “whatever we build belongs to the company” isn’t sufficient. Explicit IP assignment clauses are legally essential.

6. No Exit Provisions

Many founders avoid discussing exits because it feels pessimistic. This avoidance creates nightmares when someone actually wants to leave.

7. Overly Broad or Unenforceable Non-Compete Clauses

Non-compete clauses that are too restrictive may not be enforceable under Indian law. Keep them reasonable in scope, duration, and geography.

8. Missing Dispute Resolution Mechanisms

Without clear processes, every disagreement risks becoming a lengthy court battle.

9. Not Getting It Signed and Notarized

A draft agreement sitting in Google Docs has no legal weight. Get it printed, signed by all founders, witnessed, and ideally notarized.

10. Setting It and Forgetting It

Founder agreements should be reviewed and updated as the startup evolves, especially after funding rounds or when adding new founders.

When Should You Create a Founder Agreement?

The best time: Before you incorporate the company or start working together seriously.

The acceptable time: Within the first 1-3 months of starting the venture.

The worst time: When there’s already a dispute and you need the agreement to resolve it.

If you haven’t created one yet: Do it NOW. Even if you’ve been operating for months or years, it’s better late than never. An agreement created today prevents disasters tomorrow.

How My Legal Pal Can Help

Creating a founder agreement isn’t just about filling in a template. It requires:

• Understanding your specific startup context
• Balancing legal protection with practical flexibility
• Ensuring compliance with Indian corporate and contract law
• Anticipating future scenarios and providing for them
• Drafting clear, enforceable language

My Legal Pal specializes in startup legal documentation, including:

• Customized Founder Agreements: Tailored to your startup’s unique situation, industry, and founder dynamics
• Expert Guidance: Advice on equity split, vesting schedules, and role definitions based on startup best practices
• Comprehensive Coverage: All essential clauses including IP assignment, exit provisions, and dispute resolution
• Quick Turnaround: Most founder agreements drafted and finalized within 5-7 days
• Affordable Pricing: Transparent pricing designed for early-stage startups
• Ongoing Support: Assistance with agreement amendments as your startup grows and evolves

Don’t let a missing or poorly drafted founder agreement become the reason your promising startup fails. Get the legal foundation right from the start.

Your Startup Deserves a Solid Foundation

Building a startup is hard enough without adding preventable founder disputes to the mix. A well-drafted founder agreement isn’t red tape or bureaucracy, it’s the foundation that allows you to focus on building your product, serving customers, and growing your business.

Think of it as insurance. You hope you never need to refer to it for conflict resolution, but having it creates clarity, alignment, and protection for everyone involved.

The most successful startups, the unicorns, the market leaders, the ones that scale globally, all have one thing in common: they built their business on solid legal foundations from day one. They documented their founder relationships clearly, transparently, and professionally.

Your startup deserves the same foundation.

Don’t wait for disagreements to emerge. Don’t let verbal understandings remain unwritten. Don’t assume “we’re friends, so we don’t need paperwork.”

Create your founder agreement today. Protect your startup. Protect your relationships. Protect your future.

Frequently Asked Questions (FAQs)

1. Is a founder agreement legally mandatory in India?

No, it’s not legally mandatory, but it’s strongly recommended as a best practice. While you can start a company without one, investors will expect to see a founder agreement during due diligence. More importantly, it protects all founders and the business from future disputes.

2. What’s the difference between a founder agreement and shareholder agreement?

A founder agreement is typically created at the startup’s inception and governs the relationship between co-founders. A shareholder agreement is broader, including all shareholders (founders plus investors), and is usually created when external investors join. The founder agreement often gets superseded or incorporated into the shareholder agreement after funding.

3. Should we create the founder agreement before or after company incorporation?

Ideally before incorporation, but it can be done after as well. Many founders discuss and draft the agreement before incorporating, then formally execute it immediately after incorporation. The key is to do it as early as possible, definitely before significant work begins or IP is created.

4. Can we modify the founder agreement after it’s signed?

Yes, but typically all founders must agree to modifications in writing. Your agreement should specify the amendment process. Major changes should be documented formally, signed by all parties, and ideally reviewed by a lawyer to ensure they don’t create new legal issues.

5. What happens to the founder agreement when we raise funding?

Usually, the founder agreement gets incorporated into a more comprehensive shareholder agreement that includes investor rights and protections. Key provisions like vesting schedules, IP assignment, and non-compete clauses typically continue, while decision-making and governance sections expand to include investor board seats and voting rights.

6. How should we split equity among founders fairly?

There’s no one-size-fits-all formula. Consider:

• Initial capital contribution
• Relevant experience and expertise
• Time commitment (full-time vs. part-time)
• Who came up with the idea
• Market value each founder brings
• Strategic relationships and network

Avoid equal splits unless truly justified. Base equity on actual anticipated value contribution over time.

7. What is a standard vesting schedule for Indian startups?

The most common vesting schedule is:

• 4 years total vesting period
• 1-year cliff (25% vests after year 1, then monthly/quarterly thereafter)
• Monthly or quarterly vesting for the remaining 75%

Some startups use 3-year vesting or different cliff periods, but 4-year with 1-year cliff is the standard expected by investors.

8. Can a founder agreement prevent a co-founder from leaving?

No, you cannot legally force someone to continue working. However, the agreement can:

• Require reasonable notice period (3-6 months)
• Specify what happens to their equity (vested vs. unvested)
• Enforce non-compete and non-solicitation obligations
• Establish buyback terms for their shares

The agreement manages the consequences of departure, not prevents it.

9. Are non-compete clauses enforceable in India?

Partially. Section 27 of the Indian Contract Act generally considers restraints on trade void. However, courts have upheld reasonable non-compete clauses that:

• Are limited in duration (typically 12-24 months)
• Are reasonable in geographic scope
• Don’t completely prevent someone from earning a livelihood
• Protect legitimate business interests

During employment, non-compete clauses are generally enforceable. Post-employment clauses must be very carefully drafted.

10. What should be done with IP created before the startup was formed?

Any pre-existing IP should be:

• Disclosed in the founder agreement
• Clearly assigned to the company if it will be used in the business
• Licensed to the company if the founder retains ownership
• Excluded from company IP if it’s unrelated to the business

Never assume pre-existing IP automatically belongs to the company. Document it explicitly.

11. How detailed should role and responsibility descriptions be?

Detailed enough to provide clarity but flexible enough to allow evolution. Include:

• Primary functional areas (e.g., “Product & Technology” vs. “Business Development”)
• Key decision-making authority within their domain
• Expected time commitment
• General responsibilities

Avoid being so specific that every minor change requires agreement amendments.

12. What if a founder wants to work part-time or has another job?

This must be explicitly disclosed and agreed upon in the founder agreement. Specify:

• Expected minimum time commitment (e.g., 20 hours/week)
• Whether other employment is permitted
• Whether equity allocation differs for part-time founders
• How this affects vesting schedules

Full-time founders typically receive more equity than part-time founders due to greater commitment.

13. Should founder agreements include spouse/family clauses?

Consider including:

• What happens to equity if a founder divorces
• Whether shares can be transferred to family members
• Rights of heirs if a founder passes away
• Spousal consent requirements for major decisions

This is especially important in India where family involvement in business is common.

14. How much does it cost to get a founder agreement drafted professionally?

Professional founder agreement drafting typically costs:

• ₹15,000 to ₹50,000 for comprehensive customized agreements
• Depends on complexity, number of founders, and level of customization needed
• More complex situations (multiple founders, IP complications, unusual equity structures) cost more

This is a worthwhile investment considering the potential cost of founder disputes can run into lakhs or crores.

15. Can we use the same founder agreement template for different startups?

While you can use a similar structure, each startup requires customization based on:

• Industry-specific considerations
• Unique founder dynamics and contributions
• Different business models and strategies
• Varying equity structures and funding plans

Generic templates create more problems than they solve. Always customize for your specific situation.

Ready to create a comprehensive founder agreement for your startup? Connect with My Legal Pal for expert guidance, customized drafting, and affordable legal support tailored to Indian startups.