Founders’ agreements — common gaps in Navi Mumbai startups

A founders’ agreement is a private contract. The company is governed by the Companies Act, 2013 and by its articles. When the friendship ends, the document that was never put into the articles is the document nobody can enforce against a shareholder who simply refuses to sign. Most of the gaps below are absences, not clever drafting.

Equal shares, and no decision rule

A fifty-fifty split feels fair on the day of incorporation. It is a deadlock the moment the founders disagree on a further issue of shares, a salary, or a sale. Write the rule while you still agree: which matters need unanimity, which are day-to-day, and what buy-sell applies, with numbers. A promise to discuss in good faith is not a deadlock clause.

Vesting, code, and the relative who holds shares

• If a founder leaves in the fourth month, unvested shares should return. A cliff and monthly vesting are market practice, not a statute. Put the mechanism in the articles, not only in an email.
• The company should take an assignment of the code, the name and the designs, including work done before incorporation. A founder who will assign it later still owns it.
• Moral rights under section 57 of the Copyright Act, 1957 are not switched off by a clause copied from a foreign template. Do not pretend that they are.
• It is common for a parent or a spouse to hold shares, or for the office to sit in a relative’s premises. Disclose it. A hidden holding, with no declaration of trust, becomes the other side’s exhibit.

Clauses that feel protective and are not

Section 27 of the Indian Contract Act, 1872 makes a post-exit restraint of trade generally void. A clause that stops a founder from working in software for three years will not save the company. Spend the time on confidentiality, and on a narrowly drawn non-solicit of employees. A non-solicit of customers that is really a non-compete will be read as one.

Restrictions on transfer of shares should live in the articles as well as in the shareholders’ agreement. A private restriction the articles do not contain is a weak document on the day someone refuses to sign a transfer form. V.B. Rangaraj is still the case people cite for that instinct. Read it, and then read the articles you actually have, rather than assuming a side letter will do.

Disputes, the option pool, and the bank mandate

• Indian law, and a seat at Mumbai, for a company that lives in Navi Mumbai. A foreign seat is a cost.
• Create the employee option pool before the first priced round, with the founders’ eyes open about dilution.
• Write who is full-time, who may draw a salary, and what happens to the shares of a founder who stops working.
• Move bank mandates and tax registrations out of one founder’s personal name. A company is not a proprietorship with a certificate of incorporation on top.