Founders’ Agreement Drafting for Startups

Before you incorporate, or as soon after as possible, and before the first investor or hire. Signed early, the agreed split goes straight into the subscriber shareholding in the memorandum, and the vesting and transfer terms go into the articles. Stamp it before or at signing under Section 17 of the Indian Stamp Act, 1899. Already incorporated? Sign it now; the terms carry into the articles by special resolution.

Yes, it is a contract between the founders and binds them like any other signed, stamped agreement. Two limits apply. Section 27 of the Indian Contract Act, 1872 voids restraints on trade, so a post-exit non-compete may fail. And share-transfer terms bind the company only if they are in the articles, following the Supreme Court’s 1991 ruling in V.B. Rangaraj. Draft around both and it does its job.

It works in reverse. Founders get their shares at incorporation, and the agreement says that if a founder leaves before a share vests, they must sell it to the remaining founders at a pre-agreed price. A four-year schedule with a one-year cliff is common. From 1 April 2026, if the buyer pays below fair market value by more than ₹50,000, the whole gap can be taxed in their hands under Section 92(2)(m) of the Income-tax Act, 2025. We set the price with that in mind.

Only to a limited extent. Section 27 of the Indian Contract Act, 1872 makes any agreement restraining a lawful trade or business void to that extent. The Supreme Court held in Percept D’Mark v. Zaheer Khan (2006) that a restraint running beyond the contract term is void, while Niranjan Shankar Golikari (1967) upheld a restraint during employment. So we draft a non-compete for the period a founder is with the company, plus confidentiality and IP clauses that protect what the company owns.

Not the company, until the founder assigns it in writing. Section 19(1) of the Copyright Act, 1957 makes an assignment valid only if it is in writing and signed by the assignor. If the deed states no period, Section 19(5) limits it to five years; if it states no territory, Section 19(6) limits it to India. So the IP assignment deed says perpetual, worldwide and effective from signing. Investors check this in due diligence, and a clean deed answers the question at once.

Usually not. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 excludes promoters, the promoter group and any director holding more than 10% of the outstanding equity shares from ESOPs. A startup, as defined by the Commerce Ministry’s Startup India notification, is exempt from that exclusion for up to ten years from incorporation. Even then, there must be at least one year between the grant and vesting of an option. For most founders, shares with reverse vesting remain the simpler route.

The simplest route is for the remaining founders to buy it, at the good-leaver or bad-leaver price fixed in the agreement. The company can buy back shares under Section 68 only if its articles allow it, within 25% of paid-up capital and free reserves, with debt no more than twice capital and free reserves afterwards, and with a one-year gap between buy-backs. A transfer of physical shares is stamped at 0.015% of the consideration. With the price formula agreed upfront, the exit stays calm.

Yes. The duty is set by the stamp law of the state where it is signed, and Section 17 of the Indian Stamp Act, 1899 requires stamping before or at execution. Under Section 35, an unstamped agreement cannot be admitted in evidence until the duty and a penalty of ten times the deficient duty are paid. In Haryana, e-stamp paper is generated against a GRN on the e-GRAS portal. We confirm the current rate for your state before you buy it.