What should a founders agreement include?

Investors read founders agreements to judge whether a startup will survive its own founders. More Indian startups die of cofounder conflict than of competition — and every clause below exists because some company died without it.

The clauses that matter

1. Equity split — and the reasoning

Record the split AND the basis (capital, full-time vs part-time, idea, execution). Unequal splits are healthy when reasoned; undocumented 50-50 “to avoid awkwardness” is where deadlocks are born.

2. Vesting — the single most important clause

Standard: 4-year vesting, 1-year cliff. If a founder walks out in month 8, they leave with nothing; after the cliff, equity vests monthly/quarterly. Without vesting, a departed cofounder owns a dead-weight 30% forever — the #1 cap-table killer and a red flag for every investor.

3. Roles, titles and decision rights

Who is CEO; who owns product, tech, sales; which decisions need unanimity (fundraise, ESOP pool, sale of company, new cofounder) vs majority.

4. IP assignment

Everything created for the venture — code, brand, designs, data — is assigned to the company (not the individual). Investors will insist; do it from day one so pre-incorporation IP is captured too.

5. Leaver provisions

Good leaver (health, agreed exit): keeps vested equity, unvested lapses. Bad leaver (fraud, breach, abandonment): company/other founders can buy back even vested shares, often at a discount. Define both precisely.

6. Transfer restrictions

Right of first refusal (ROFR) so a founder cannot sell to an outsider before offering the company/cofounders; tag-along for minority protection; lock-in during early years.

7. Confidentiality, non-compete, non-solicit

During the venture + a reasonable tail (12–24 months). Note: post-employment non-competes are hard to enforce in India (Section 27, Contract Act) — draft them narrowly (non-solicit of employees/customers, confidentiality) so the enforceable parts survive.

8. Deadlock and disputes

Escalation ladder: cool-off + mediation → arbitration (seat, single arbitrator). For 50-50 companies, add a deadlock-breaker (casting vote on defined domains, or shotgun/buy-sell clause as a last resort).

9. Money matters

Founder salaries (and when they start), expense policy, who signs the bank account, initial capital and whether founder loans convert to equity.

When and how to execute

• Before incorporation ideally; at incorporation, mirror key terms into the company’s Articles of Association — clauses in the AoA bind the company, not just the founders inter se.
• Stamp it per your state’s stamp law; each founder keeps an original.
• Revisit at each funding round — the shareholders’ agreement (SHA) will supersede parts of it.

Classic mistakes

• “We’re friends, we don’t need paperwork” — the most expensive sentence in startups
• No vesting; no bad-leaver clause; IP in a founder’s personal name
• Copy-pasting a US template (Delaware concepts, unenforceable non-competes) without Indian-law drafting

This article is general information, not legal advice. For advice on your specific situation, consult a qualified professional.