Co-founders' Agreement in India: Equity, Vesting, IP & Exit

The agreement records how founder equity is divided — ideally reflecting contribution, risk, and role rather than a reflexive equal split. But the split alone is not enough. The most important protective mechanism is vesting: founders earn their equity over time (a common structure is four years with a one-year 'cliff'), so a founder who leaves early forfeits the unvested portion.

Vesting is what stops an early-departing co-founder from keeping equity they never earned, and it is what serious investors expect to see. The cliff means nothing vests in the first year, protecting the company if a founder proves to be the wrong fit early on.

• Split by contribution/role/risk, not a reflexive 50-50.
• Vesting over ~4 years with a 1-year cliff (nothing vests in year one).
• Unvested equity returns to the company if a founder leaves early.

The agreement should define each founder's role and authority, which decisions need unanimity or a super-majority (issuing shares, taking debt, selling the company, changing the business), and how day-to-day calls are made. Clear decision rights prevent the slow paralysis that kills startups where 'everyone' owns 'everything'.

Equally important is a deadlock mechanism — a pre-agreed way to break an impasse between an even number of founders (a casting vote, a mediator, or a buy-sell 'shotgun' clause). Deciding this while everyone is friendly is far easier than during a fight.

Every founder must assign all intellectual property they create for the venture — code, designs, brand, content, inventions — to the company itself. This sounds obvious, but its absence is one of the most common and dangerous defects: if the IP sits personally with a founder who later leaves, the company may not own its own product, and any investor's due diligence will flag it.

The clause should be present-assignment (assigning IP as it is created), cover pre-incorporation work, and include a duty to sign further documents. Without it, the company's core asset is legally unstable.

The agreement must say what happens to a departing founder's shares. 'Good leaver / bad leaver' provisions distinguish an honourable exit (illness, mutual agreement) from a departure for cause (misconduct, breach) and set different consequences — typically, a good leaver may keep vested shares while a bad leaver can be required to sell some or all shares back, often at a lower valuation.

Coupled with vesting and a company right of first refusal on any share transfer, leaver clauses ensure that equity stays with people building the company, not with those who have exited.

• Good leaver (illness, mutual exit) vs bad leaver (misconduct, breach) — different outcomes.
• Bad leavers can be required to sell shares back, often at a discount.
• Pair with vesting + company/founder right of first refusal on transfers.

Confidentiality is essential and fully enforceable. Non-compete and non-solicit clauses are used, but note that in India a post-employment non-compete that restrains a person's trade is generally unenforceable under Section 27 of the Indian Contract Act — so these must be drafted narrowly (protecting confidential information and soliciting of staff/clients) to have effect.

Finally, the co-founders' agreement is not the same as the shareholders' agreement (SHA) that investors will require at a funding round, which adds investor-protection terms (board seats, reserved matters, liquidation preference, drag/tag-along). A well-drafted founders' agreement anticipates the SHA so the two align. Getting all of this right is exactly the kind of matter to run past a specialist — your case assessment on NyaySevak is free.