Most founder disputes I see would have been prevented by a two-page document signed in month one. The problem is that nobody wants to discuss failure while everyone is excited.
The clauses that matter most
- Equity split, and whether it is fixed or adjusts on milestones.
- Vesting with a cliff. The single most important clause. Typically four year vesting with a one year cliff, so a founder who leaves in month eight takes nothing and a founder who leaves in year two takes half. Without it, a co-founder can walk away in month three holding 50 percent of a company they no longer contribute to, and there is nothing you can do.
- IP assignment. Everything created by a founder for the business is assigned to the company. Under the Copyright Act the author owns the work unless there is an assignment or a contract of employment, so code, designs, content and brand assets created by a founder before incorporation belong to that founder personally until assigned in writing.
- Roles, responsibilities and time commitment, including whether a founder may hold another job.
- Decision-making: what needs unanimity, what does not, and how deadlock is broken in a two-founder company.
- Leaver provisions: good leaver and bad leaver, what happens to vested and unvested shares, and at what price.
- Confidentiality and non-solicitation, which are enforceable, unlike broad post-exit non-competes.
Every investor will require vesting and IP assignment at the term sheet stage. Doing it then means renegotiating equity with a co-founder while a funding round is on the table, which is the worst possible moment. Doing it at the start costs nothing because nobody has anything yet.
Getting the IP assignment right, because most of them are defective
An assignment clause that simply says all intellectual property vests in the company is usually not enough. Section 19 of the Copyright Act, 1957 imposes formalities, and three of its sub-sections quietly destroy assignments that ignore them.
- The assignment must be in writing signed by the assignor, and it must identify the work and specify the rights assigned, the duration and the territorial extent.
- If the assignee does not exercise the rights assigned within one year from the date of assignment, the assignment in respect of those rights is deemed to have lapsed, unless the assignment says otherwise. A holding company that takes an assignment and does nothing with it can lose it.
- If no period is stated, the assignment is deemed to be for five years. If no territory is stated, it is presumed to extend within India only.
So the clause has to name the works, state that the assignment is perpetual and worldwide, and be signed. Add a present assignment of existing work and an agreement to assign future work, plus a power of attorney to execute anything further the company needs. And remember that work created before incorporation cannot be assigned to a company that did not yet exist; the standard fix is for the company, once incorporated, to adopt and ratify the pre-incorporation arrangement by board resolution and for the founders to execute a fresh confirmatory assignment in its favour.
How vesting is actually implemented in an Indian company
This is where founders agreements copied from American templates fail. An Indian company cannot simply cancel or claw back shares that have been issued. Reverse vesting has to be built as a contractual obligation to transfer: on a leaver event the departing founder is obliged to sell the unvested shares to the continuing founders, or to a nominee, at a nominal or par price, usually backed by a call option and a power of attorney to execute the transfer form. That obligation must also go into the articles, because the company is otherwise entitled to register a transfer that ignores it. An alternative is to keep part of the equity unissued and release it on milestones, which avoids the clawback problem altogether.
Getting it into the company
Once the company is incorporated, the founders agreement should be reflected in the articles of association and, where investors come in, folded into the shareholders agreement. An agreement that sits in a drawer and contradicts the articles will not do the job.
It also sits inside a wider set of documents that a company needs from the first month rather than the first funding round: employment and consultant agreements with proper assignment clauses, a confidentiality agreement, board and shareholder resolutions, statutory registers, and the share certificates themselves. Our note on the legal documents a startup actually needs lists them in the order they become necessary.
When the first institutional round arrives, every one of these clauses is reopened. Investors routinely require founder vesting to be reset from the date of investment rather than the date of incorporation, a full set of representations and warranties on IP ownership, and founder lock-in for the duration of the investment. Reading the term sheet against your existing founders agreement before you sign it is what tells you which of your arrangements you are about to give away.