पाठशाला Pathshala · दल Dal, The team · Lesson 04 · Start

The co-founders’ agreement: what it must contain

A founder dispute becomes a company-ending event when there is nothing to point to. The agreement is the thing to point to: roles, vesting, IP, decision rights and exit, and the one step that makes it enforceable in India.

Pathshala, The Founder Library · 11 October 2026 · 8 min read

Every founder dispute has the same shape. Two people remember the same conversation differently, nothing was written down, and the company, which is the thing both of them care about, becomes the hostage. The co-founders’ agreement does not prevent the dispute. It prevents the hostage-taking, by settling in advance what happens when one of them wants out, or wants more, or wants a different company.

This lesson is the brief for that document: what it is and is not, the six things it must contain, the two Indian rules that decide how it is drafted, and a checklist to take to the lawyer so that the meeting is an hour long. It assumes the [forty questions](/library/choosing-a-cofounder-forty-questions) have been asked and the [split](/library/splitting-founder-equity-equal-or-unequal) decided. The agreement records those decisions; it does not make them.

What it is, and what it is not

A co-founders’ agreement is a private contract between the founders, and after incorporation between the founders and the company, governing their relationship as shareholders and as the people running the business. It is signed before or shortly after incorporation. It is not the memorandum and articles of association, which are the company’s public constitution filed with MCA. It is not the shareholders’ agreement that arrives with the first institutional investor, which will supersede most of it. And it is not an employment contract, although each founder should also have one of those, because the Companies Act and the Income-tax Act treat a founder who draws a salary as an employee for several purposes.

The distinction from the articles matters more in India than almost anywhere, for a reason that comes later in this lesson. For now: the agreement is where the founders decide; the articles are where the decisions are made enforceable against the company.

Roles, time, equity and vesting

The agreement names the CEO. One person. It describes each founder’s area in a paragraph specific enough that a stranger could judge whether the work was done: not “technology” but “ships the product, owns the engineering hires and the infrastructure budget”. It states the date each founder is full-time and, where one is not, what happens if the date is missed: usually a reduction in that founder’s unvested shares, agreed now. Noam Wasserman’s research found that most founders do not remain chief executive to the end, so the agreement should also say how the CEO is changed. By the board, or by a defined majority of founders. Never by the louder voice in a room.

The split goes in as a number of shares and a percentage, with the paragraph of reasons from the split lesson. Then vesting, on every founder without exception. In an Indian private company the founders’ shares are issued at incorporation and are owned outright, so vesting is done in reverse: the agreement gives the company or the other founders the right to acquire a departing founder’s unvested shares at par. Four years, a one-year cliff, monthly after the cliff, credit for time already served, double-trigger acceleration on a sale. The [vesting lesson](/library/vesting-and-the-cofounder-cliff) sets out each term and why. If a founder has put in cash, it is documented here too, as a loan or as shares bought at a stated price, separately from the split.

Intellectual property: the clause investors ask for by name

Before incorporation there is no company to own anything, so the code, the designs, the brand name and the customer list belong to whichever founder made them. After incorporation they still do, until assigned. A present assignment of all intellectual property created for the business, before and after the company existed, is the single clause an investor’s lawyer will ask to see by name in due diligence, and the one most founders discover they do not have.

Indian law makes two demands here. Under section 19 of the Copyright Act an assignment of copyright must be in writing, signed by the assignor, and must identify the work and specify the rights, the territory and the duration; leave the territory or term unstated and statutory defaults of India and five years apply, and rights not exercised within a year can lapse back. Under section 17 the employer is the first owner of a work made in the course of employment, which helps for employees but not for founders who wrote code before they were anyone’s employee. For inventions the position is weaker still: as ATB Legal’s note on Indian IP assignment sets out, there is no statutory rule vesting an employee’s invention in the employer, so the inventor owns it unless the contract contains an express present assignment, a duty to assist with filings and an acknowledgement of the company’s ownership. Put all three in. Add a schedule of prior IP each founder keeps, so the open-source library one of you maintains is not swept in by accident.

Decision rights and deadlock

Most decisions belong to the founder whose area they fall in; the roles paragraph does this work and the agreement should say so. A short list of reserved matters needs every founder: issuing new shares, borrowing above a limit, selling the company or a material part of it, admitting a new founder, changing the business. Six to ten items. A list of thirty is a veto on running the company.

Then the board. Michael Seibel’s advice from Y Combinator is that before a major equity raise only the CEO should hold a board seat, so that a dispute about a co-founder cannot be blocked by that co-founder from the board. Many Indian founders find this uncomfortable and settle for a board of all founders with the CEO holding a casting vote. Either works; a board of two with no casting vote does not.

Deadlock between two equal founders is the case the agreement exists for. Three steps, each with a time limit: a cooling-off period of two to four weeks in which neither acts; a named mediator whom both trust, chosen now while they still agree on who is fair; then binding arbitration under the Arbitration and Conciliation Act, with the seat named. Arbitration is not fast but it is faster than a civil suit, and the knowledge that it exists resolves most disputes before the mediator is called.

A founders’ agreement is not a statement of distrust. It is the two of you, on your best day, deciding what the two of you will do on your worst.

Leaving, and the non-compete that does not work

The leaver clauses decide what happens to a departing founder’s shares, and they depend on why the founder left. A good leaver, through illness, agreed departure or dismissal without cause, keeps vested shares and sells unvested ones back at par. A bad leaver, dismissed for cause or in breach, may be made to sell vested shares as well, at a discount. Define cause narrowly and in writing, agree the method for valuing vested shares now, and give the company a call option at fair value on death or incapacity, because the shares otherwise pass to heirs who signed nothing. Add a right of first refusal on any sale of founder shares, a bar on transfers to competitors, and drag-along and tag-along so that a sale agreed by the majority cannot be blocked by one founder nor made without them.

Then the clause founders want and cannot have. Section 27 of the Indian Contract Act, 1872 makes an agreement in restraint of trade void, and the courts have applied it consistently to employment: a restriction during the term of the contract is generally enforceable, a restriction after it ends is generally not. The Supreme Court in Percept D’Mark held that a restrictive covenant extending beyond the term of the contract is void, and the Delhi High Court in Pepsi Foods struck down a twelve-month post-termination bar on joining a competitor; a 2023 survey of the case law collects the authorities. A founder who leaves can start a competing company the next morning and the clause saying otherwise will not stop them.

What does work: a non-compete while the founder is with the company; confidentiality that survives departure; a non-solicitation of staff and customers for a defined period, which courts have been more willing to uphold where it protects confidential information rather than restraining employment; and vesting, which is the real deterrent, because a founder who leaves to compete in month fourteen walks away from most of their equity. Draft the first three, rely on the fourth.

Making it bind: the Rangaraj problem

In V.B. Rangaraj v V.B. Gopalakrishnan, decided in 1992, the Supreme Court held that the only restriction on the transfer of a company’s shares is the one laid down in its articles, so a pre-emption right agreed between shareholders but not written into the articles did not bind. The position has been debated since, and later decisions have softened it in places, but the practical rule for founders is unchanged: a transfer restriction, a vesting buy-back or a reserved matter that lives only in the agreement may not be enforceable against the company. Write those provisions into the articles as well. A private company’s articles may restrict the transfer of its shares, which is part of what makes it private, so this is ordinary drafting rather than an unusual request. Then make the company a party to the agreement once it exists, so that the company can enforce the IP assignment and the buy-back in its own name.

Two formalities. The agreement attracts stamp duty, which varies by state; an unstamped document is admissible in evidence only after penalty duty is paid, so pay it the week you sign. And include a clause saying the agreement will be revisited at the first institutional round, because the investors’ shareholders’ agreement will replace most of it and founders who are not expecting that read the replacement as a loss.

Getting it signed in two weeks

Week one: the founders fill in every item above between themselves, in plain language, in a shared document. Roles, dates, split, reasons, reserved matters, the mediator’s name, what counts as cause. This is the brief, and a lawyer given a complete brief drafts in days. Week two: a lawyer who has drafted Indian founders’ agreements before, not a general practitioner, turns the brief into the agreement and into matching articles. One round of comments. Sign, stamp, witness. File the articles with the incorporation if the company does not exist yet, or amend them by special resolution if it does.

Then put two dates in every founder’s calendar: the cliff, and the first institutional round. The agreement is reopened on those two days and on no others. The point of writing it down is that you stop discussing it.

Nothing here is legal advice. The law on restrictive covenants and on the articles is case law and it moves; a lawyer who has drafted founders’ agreements under the Companies Act, 2013 is the cheapest part of this process and the only one who should write the clauses.