Founders' agreement and SHA: clauses that prevent co-founder disputes
Authored by - Adv. Pranay Sawant, Senior Executive at Outsource360 On 25 July 2023, a logistics joint venture sent two of its minority shareholder-directors a termination notice. By their account, their email access had been cut in June and their salary and profit share stopped. Each held 12% of the company and had run its sales and business development.
What neither held was a document recording what they said they'd been promised at the start. It's the kind of fight a founders' agreement is written to prevent, and it reached the Delhi High Court two years later.
The company had been incorporated in June 2017. By their own account, the two had been promised orally that their stakes would rise to 25% each, more than double what they held, and nothing recorded it. A shareholders' agreement followed on 28 April 2018, which they said they never saw in draft. Its clause 15 barred them from the "same or relatively same business", stated that the restriction continued for three years after termination, and fixed a minimum Rs 1 crore "penalty" for breach.
The trouble surfaced in June 2023, when the majority side issued a show-cause notice invoking clause 15, and the termination notice followed in July. Their answer: their roles were over, so the SHA had ended with them, and clause 15 was now a restraint of trade, void under section 27 of the Indian Contract Act, 1872. It's the argument almost any departing founder would reach for. And it didn't work.
An arbitrator's interim award of 16 December 2024 held that the SHA still subsisted and enforced clause 15, narrowed to international logistics and freight forwarding, with liberty to seek changes on full disclosure of their activities. The Delhi High Court dismissed their appeal on 28 July 2025 (ARB. A. (COMM.) 5/2025). "The SHA is a commercial agreement entered into between equity holders, establishing rights and obligations in the capacity of shareholders, not as employees or executives", the court said, and "restrictive covenants during the term of a valid contract are not considered in restraint of trade". The court did not decide whether the three-year restriction after termination would hold.
Three lessons carry over to any startup, whatever its sector. A promised stake that isn't written into a founders' agreement is an argument, not an asset. Losing their management roles didn't end their obligations as shareholders: while the SHA subsisted, clause 15 still bound them.
And a founders' agreement that says who buys a departing founder's shares, at what price and which restrictions then end is the difference between a clean exit and years of litigation. The practical answer: put those terms on paper before anyone needs them, and a co-founder's departure becomes a routine transaction rather than a lawsuit.
A founders' agreement (or co-founder agreement) is a contract between a startup's founders that fixes equity, vesting, roles, IP ownership and what happens when a founder leaves. A shareholders' agreement (SHA) usually replaces it at the first priced funding round, adding investors and governance rights. In India, any limit on transferring shares also belongs in the company's articles.
The sections below map each founders' agreement and SHA clause to the dispute it prevents, then follow the documents from formation to the first priced round and into the articles. Indian law runs throughout, with US and UK notes where the law changes the clause.
On this page
What should a founders' agreement include? The clause-to-dispute map
Founders' agreement vs shareholders' agreement: what's the difference?
How to split equity and set up founder vesting
Good leaver, bad leaver: what happens when a co-founder leaves
IP assignment and non-competes: protecting the company from a leaver
Shareholders' agreement clauses: reserved matters and transfer rights
Deadlock clauses: how to break a 50/50 tie between co-founders
Making a founders' agreement and SHA enforceable in India
Founders' agreements in India, the US and the UK: what changes
Frequently asked questions about founders' agreements
What should a founders' agreement include? The clause-to-dispute map
A founders' agreement should cover the equity split, vesting, leaver terms, roles and decision rights, money, IP assignment, restrictive covenants, transfers, deadlock and personal events. Each clause exists because a particular fight is predictable. The map below pairs every clause with the dispute it prevents and the document it usually ends up in.
Clause | The dispute it prevents | Where it lives |
Equity split, with the reasoning recorded | "I've done more than you": who got what, and why | Founders' agreement |
Vesting with a one-year cliff | A co-founder leaves early with a full stake | Founders' agreement, then the SHA and articles |
Good, bad and intermediate leaver terms | What a leaver's shares are worth, and who pays | SHA and articles |
Roles, pay and capital | Who decides, who funds the company and what each founder draws | Founders' agreement |
IP assignment | A leaver claims the code or the brand | Founders' agreement, re-signed with the company |
Confidentiality, non-solicit and non-compete | A leaver takes clients, staff or know-how to a rival | Founders' agreement and SHA |
Reserved matters and board seats | A founder or investor is outvoted on a major decision | SHA and articles |
ROFR, ROFO, lock-in, tag and drag | A founder sells to an outsider, or blocks a sale the others want | SHA and articles |
Deadlock and dispute resolution | A 50/50 tie freezes the company | Founders' agreement or SHA |
Death and incapacity | Heirs or creditors end up holding a founder's shares | SHA and articles |
Is a founders' agreement legally binding in India?
Yes, if it passes the ordinary tests. Section 10 of the Indian Contract Act, 1872 makes an agreement a contract if made "by the free consent of parties competent to contract, for a lawful consideration and with a lawful object". The Companies Act, 2013 requires neither a founders' agreement nor an SHA, and each binds only the people who sign it.
That last point has teeth: a company that never signed or accepted the agreement isn't bound, and transfer restrictions bind it only once they're in its articles (the enforceability section explains why). An unstamped agreement isn't void either, but it cannot be used in evidence until duty and a penalty are paid.
Titles don't settle ownership: "co-founder" carries no shares by itself; ownership is what the company has issued. Unlike a partnership deed, the agreement sits beside the company's own constitution, the articles.
When should co-founders sign: before or after incorporation?
Sign as soon as the founders start building, then again with the company. Why twice? Under sections 15(h) and 19(e) of the Specific Relief Act, 1963, a company can enforce, and be bound by, its promoters' pre-incorporation contract only if the contract is warranted by the terms of incorporation and the company has accepted it and communicated that acceptance. So ratify it with the company as a party once it exists (above all the IP assignment and vesting call option), and mirror the key terms in the articles.
An oral promise can still be a contract (a question founders raise on r/startups). But proving its terms years later is hard, as the Delhi shareholders' claimed 25% shows. If no company is ever formed, the co-founder agreement still binds the founders, so say who keeps the code and name.
Founders' agreement vs shareholders' agreement: what's the difference?
A founders' agreement is signed by the founders at or before incorporation and settles ownership, vesting, roles and IP between them. A shareholders' agreement is signed by all shareholders, usually with the company, at the first priced round, and adds investor rights and controls. The SHA normally supersedes the founders' agreement, though not every term.
Question | Founders' agreement | Shareholders' agreement (SHA) |
When is it signed? | At or before incorporation | Usually at the first priced round, alongside the share subscription agreement |
Who signs? | The founders, and the company once it exists | All shareholders, usually with the company |
What is it for? | Ownership, vesting, roles and IP between founders | Control, investor rights, transfers and exits |
Typical clauses | Equity split, vesting, roles, IP assignment, confidentiality, leaver terms | Board seats, reserved matters, ROFR, tag, drag, anti-dilution, information rights, deadlock |
Does it bind the company? | Only once the company exists and accepts it | Yes, if the company signs; transfer terms must also be in the articles |
Does it need the articles? | Yes, for vesting call options and transfer limits | Yes, for transfer restrictions, leaver terms and reserved matters |
What happens at the next round? | Usually superseded; IP and confidentiality terms survive or are restated | Amended, or replaced by a new SHA |
Legally required in India? | No | No |
What the SHA replaces, and what survives
An SHA usually carries an entire-agreement clause, superseding earlier agreements among the same parties. That's the trap. What survives? Only what the founders restate or expressly preserve: typically the IP assignment (restated with the company as a party, and worded so it cannot lapse, as the IP section explains) and confidentiality, while vesting, leaver terms, transfer rights, reserved matters and board seats get rewritten.
Expect a vesting conversation. Investors commonly ask for vesting on founder shares where there was none, or a reset where there was; founders on Reddit describe it as a condition of the round. Our recommendation: settle credit for time served first, then negotiate acceleration on a sale, good-leaver treatment on dismissal without cause and a cap on how much re-vests. And gaps in the founders' agreement get filled on the investor's draft, so weak founder terms become the investor's starting point.
Anti-dilution and investor exit clauses sit on top of these founder terms, and in India both run into exchange-control pricing limits; the funding-round compliance checklist explains why, and what the term sheet binds you to before the SHA is signed.
The handover checklist for the first priced round
At the first priced round, run the founder documents through this sequence:
List every founders' agreement term and mark it: keep, move into the SHA, or drop.
Restate the IP assignment with the company as a party: worldwide, for the full copyright term, in all media.
Agree any founder vesting reset, with credit for time served and acceleration on a sale.
Carry the leaver definitions into the SHA, naming the valuation method for fair market value.
Sign the share subscription agreement and the SHA together, with an entire-agreement clause listing what survives.
Pass a special resolution altering the articles to mirror the transfer, leaver, drag and reserved-matter terms.
File the altered articles with the Registrar within 15 days, as section 14 of the Companies Act, 2013 requires.
Stamp the SHA under the relevant state's law: unstamped, it cannot be used in evidence until duty and penalty are paid.
How to split equity and set up founder vesting
In a founders' agreement, split equity by what each founder will contribute over the next four years, not by who had the idea, and protect it with vesting. Vesting lets a founder earn full ownership over time, commonly four years with a one-year cliff, so a co-founder who leaves early doesn't keep a full stake.
Equity split: equal, or weighted by contribution?
Research from Harvard Business School, published in The Founder's Dilemmas (Princeton University Press, 2012), found that about 65% of the high-potential startups that failed did so because of people problems, a category that includes co-founder conflict. Equal splits are rising anyway: Carta's data of 18 June 2026 shows 44.6% of two-founder teams formed in 2025 split equity equally, the highest point of the past decade and up from 34.5% in 2016. The median split was 51-49, against 57-43 in 2021.
Y Combinator's essay on splitting equity argues equal or near-equal splits "should become standard". So is 50/50 a mistake? Not if vesting and a deadlock clause come with it. A sounder method weights what each founder brings over the next four years (time, role, capital, IP, salary given up) and records the reasoning, because an unexplained split is the easiest term to reopen.
One Reddit founder's post is typical: 50/50 agreed on a handshake, regretted a year later. Record pay too: whether founders draw a salary, defer it or take none until a set milestone.
Worth flagging: the same Carta page shows that between 25% and 35% of two-founder teams founded from 2016 to 2021 had parted ways after five years, and more than 40% of 2016-2018 teams within eight. So the vesting clause, not the split, is the real equity decision; without it, an equal split hands half the company to whoever leaves first.
Founder vesting: four years, a one-year cliff and acceleration
The convention Y Combinator describes is four years of vesting with a one-year cliff: leave within the first year and nothing has vested, at the one-year mark 25% vests, and every month after that another 1/48th of the total. Twelve months is the documented norm for the cliff. What if a co-founder walks at month 11? Then every share falls under the leaver terms.
Founder vesting in India usually runs in reverse. The shares are issued upfront, and the SHA and articles give the co-founders or a nominee a call option over the "unvested" shares if the founder leaves, at a nominal price or a pre-agreed percentage of fair market value, according to Indian startup-law commentary. The leaver section covers who can exercise it, and the tax.
Acceleration brings vesting forward on a sale (single-trigger) or on a sale plus loss of the founder's role without cause (double-trigger). Founder vesting on issued shares is a contract between shareholders; employee options run under a separate statutory ESOP scheme, and the ESOP structuring guide explains when founders themselves can hold options.
Having the clause is only the start. At BharatPe, a co-founder who resigned in March 2022 held about 8.5%, 1.4% of it unvested. The company began a Singapore International Arbitration Centre arbitration in December 2022 to claw back the unvested shares, which the SHA allowed, PTI reported on 9 December 2022. Outlook Business reported a settlement only on 30 September 2024.
Good leaver, bad leaver: what happens when a co-founder leaves
When a co-founder leaves, the leaver clause decides what happens to their shares. Vested shares usually stay; unvested shares are bought back, at fair market value for a good leaver and at a lower price such as nominal value or cost for a bad leaver. In India, who buys matters as much as the price.
Leaver type | Common triggers | Unvested shares | Vested shares |
Good leaver | Death, incapacity, dismissal without cause, leaving after an agreed date | Bought back, often at fair market value | Kept, or bought at fair market value |
Intermediate leaver | Resigning without cause before an agreed date | Bought back at the lower of cost and fair market value | Kept |
Bad leaver | Dismissal for cause, material breach, breach of covenants, fraud | Bought back at nominal value or cost | Kept, or bought back at a discount if the agreement says so |
Drafting patterns, not law: the founders' agreement or SHA defines every trigger and price, and in India a transfer below fair market value can be taxed on both sides.
Define "cause" narrowly and objectively, give resignations an intermediate-leaver category, and fix the valuation method and valuer in advance, with payment by instalments. A fair-market-value price needs a valuation someone will sign, and the valuation methods guide explains who can sign a fair-market-value report.
"My co-founder stopped working but still holds 50%" is a familiar forum complaint.
Removing someone from the board or a job doesn't touch their shares; a leaver clause does. Without one, shares are movable property under section 44 of the Companies Act, 2013 and stay put: the others can negotiate or petition the NCLT.
Who can buy back a leaver's shares in India, and at what price
Rarely the company. Section 68 of the Companies Act, 2013 allows a buyback only from free reserves, the securities premium or another issue's proceeds, and s.68(5) permits three modes: proportionately from existing shareholders, the open market, or employees' stock-option or sweat-equity shares. The Act lists three buyback routes, and a buyback of one founder's shares is not among them.
So the call option works as a transfer to the co-founders, a nominee or an employee trust (a Tribunal-approved capital reduction or an NCLT order is rarer). But a nominal price isn't free. Section 79 of the Income-tax Act, 2025 deems fair market value the leaver's sale price for capital gains. Section 92(2)(m) of the same Act taxes the buyer's whole shortfall, if over Rs 50,000, as income from other sources (formerly sections 50CA and 56(2)(x) of the 1961 Act).
FEMA pricing rules, in the RBI's Master Direction on foreign investment, run by direction: a resident may not transfer to a non-resident below fair value (para 8.2), nor a non-resident to a resident above it (para 8.3.1). A nominal clawback from a resident founder to a non-resident buyer breaches the rule.
Under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, private companies that were not small companies on 31 March 2023 had until 30 June 2025 to dematerialise, and shares must be dematerialised before transfer. The transfer also carries 0.015% stamp duty under the Indian Stamp Act, 1899.
A worked example: the co-founder who leaves at month 20
Take a hypothetical Indian private company with 9,600 shares of Rs 10, issued at face value: Founders A and B hold 4,800 each, both resident. Each founder's shares vest over 48 months with a 12-month cliff: 1,200 at month 12, then 100 a month. B resigns at month 20 with 2,000 vested and 2,800 unvested.
As an intermediate leaver, B sells the 2,800 to A at the lower of cost (Rs 10) and fair market value, which a valuer puts at Rs 2,500 a share (assume the income-tax rules agree). A pays Rs 28,000 for shares worth Rs 70,00,000.
The real cost? Under the Income-tax Act, 2025, section 79 taxes B as if paid Rs 70,00,000 (a gain on paper of Rs 69,72,000 against B's Rs 28,000 cost), and section 92(2)(m) taxes A's Rs 69,72,000 shortfall as income from other sources.
Paying fair market value removes the gap. But A would need Rs 70,00,000; instalments, or a nominee or employee trust as buyer, help. Were A non-resident, a Rs 10 transfer from resident B would breach para 8.2 (the reverse direction sits within para 8.3.1).
Death, incapacity and other personal events
A nominee under section 72 of the Companies Act, 2013 takes a deceased holder's shares. But the Supreme Court held on 14 December 2023 that the nominee holds for a limited purpose; succession law decides the owner. Without a call option on death at fair value and transmission limits in the SHA and articles, heirs keep the shares. A private company refusing a transmission must give notice within 30 days (section 58(1)).
Define incapacity (say, unable to work for a set period) and make it a good-leaver event. On divorce or insolvency, transfer restrictions in the articles are the main protection; their force against a court order depends on family or insolvency law.
IP assignment and non-competes: protecting the company from a leaver
Two sets of founders' agreement clauses stop a departing founder taking the business: an IP assignment moving what the founder built into the company, and covenants on confidentiality, solicitation and competition. Indian law sets a trap in each: a loose assignment can shrink to five years and one country, and a non-compete that bites after exit is generally void.
Who owns code a founder wrote before the company existed?
The founder does, unless it's been assigned. Section 17 of the Copyright Act, 1957 makes the author the first owner; the employer takes a work only if made under "a contract of service or apprenticeship". A founder coding before incorporation, or as an unpaid non-employee director, has no contract of service.
Section 18(1) lets future works be assigned, effective once they exist, but excludes media not in use at the time unless named. Section 19 wants a signed written assignment naming the work, rights, duration, territory and consideration; rights unused for a year lapse unless it says otherwise, no stated period means five years, and no territory means India.
So a one-line "I assign all IP to the company" can shrink to five years in India. The fix: worldwide, for the full copyright term, all media including future ones, consideration stated, the one-year lapse excluded, and re-signed with the company once it exists.
The US shows what a missing assignment can cost. In February 2013 an individual sued Snap in Los Angeles, alleging it was using IP the claimant jointly owned with its founders. Snap settled in September 2014 for $157.5 million, paying $50.0 million in 2014 and $107.5 million in 2016, as its 2017 listing prospectus disclosed.
Non-compete clauses: what Indian law enforces against a co-founder
Section 27 of the Indian Contract Act, 1872 reads: "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." The one exception lets a goodwill seller agree with the buyer not to compete within reasonable local limits.
A 2006 Supreme Court decision, as quoted by the Delhi High Court in July 2025, holds that a covenant running beyond the contract's term is void and that the doctrine doesn't apply during the contract. Nor is it confined to employment contracts, so it reaches SHAs. That's why the Delhi shareholders stayed bound. And it's why the Supreme Court on 14 May 2025 (2025 INSC 691) upheld a three-year minimum-service term with Rs 2 lakh liquidated damages: an in-term covenant "does not put a clog on the freedom of a contracting party to trade or employment".
After employment ends, the Delhi High Court held on 25 June 2025 (FAO 167/2025), a non-compete is void. But confidential information stays protectable. The employment contracts guide explains why a post-exit non-compete fails in India, and what protects the company instead.
So can a departing co-founder open a rival next month? Usually, unless the exit was a genuine sale of goodwill, such as selling the whole business; a minority stake sold to co-founders doesn't obviously sell the goodwill of a business. We found no Supreme Court judgment that squarely decides the point.
The Bombay High Court on 21 January 2026 refused interim measures partly because damages remained available, so a pre-agreed, evidenced liquidated-damages figure does more work than the covenant. A Delhi High Court ruling of 4 December 2024 (O.M.P.(I) (COMM.) 385/2024) refused similar relief in a joint-venture SHA dispute.
Shareholders' agreement clauses: reserved matters and transfer rights
Once investors join, the shareholders' agreement holds the clauses that decide who controls the company and who can sell. For founders, four matter most: reserved matters and board seats, rights of first refusal or offer, tag-along and drag-along rights. In an Indian private company, each should also be written into the articles of association.
Reserved matters and board seats
Reserved matters are decisions that need a named shareholder's or group's consent: typically issuing new shares, changing the articles, selling the business or its IP, borrowing above a limit, related-party deals and changing the business plan. Board seats come through nomination rights, often tied to a minimum shareholding, so a founder diluted below it loses the seat.
Who has more power, a director or a shareholder? Directors run the company through the board; shareholders decide what the Act and articles reserve to them, and an SHA binds only those who sign it. "CEO" and "co-founder" are titles; power comes from shares, board seats and reserved matters. And for a minority founder who has left the board, a veto over new share issues is what stops dilution by stealth.
ROFR, ROFO and lock-in: who can buy a founder's shares
Section 2(68) of the Companies Act, 2013 defines a private company as one that "by its articles" restricts the right to transfer its shares, so transfer restrictions are a statutory feature of the articles. A right of first refusal (ROFR) makes a founder with an outside offer first offer the same terms to existing shareholders; a right of first offer (ROFO) makes the founder ask them for an offer before going outside. A lock-in bars any sale for a set period or until an exit.
One Reddit founder's worry, a 50/50 partner selling to his father, has a simple answer: a ROFR in the articles lets the other founder match first. A private company refusing to register a transfer must send notice with reasons within 30 days, and the refusal can be appealed to the Tribunal under section 58.
Drag-along and tag-along rights: setting the thresholds
Drag-along lets holders of an agreed majority force the rest to sell to a buyer on the same terms; tag-along lets a minority join a majority's sale on the same terms. The drag threshold is a negotiated one, often a supermajority that includes investor consent. Can a 30% founder be forced to sell? Yes, if holders above the threshold trigger it, so the protections matter.
The protections worth demanding are a price floor or minimum return, the same price and form of consideration for everyone, warranties from dragged founders limited to title and capacity, no drag before a set date, and the drag written into the articles. FEMA adds a limit: a resident cannot sell to a non-resident buyer below fair value. Under para 8.3.2 of the RBI's Master Direction, a non-resident "is not guaranteed any assured exit price", so a drag or put that promises a foreign investor a fixed exit price conflicts with the rule.
When a buyer arrives, the drag-along threshold and every investor veto become the constraint set, and the M&A process guide shows how drag-along thresholds surface in a sale.
Deadlock clauses: how to break a 50/50 tie between co-founders
A deadlock clause decides what happens when co-founders disagree and neither has the votes to win. The best ones escalate in steps: talks, then advisers or mediation, then a buy-sell mechanism such as a shotgun or Texas shoot-out, with arbitration or the NCLT as the last resort. Equal splits need one most.
Mechanism | How it works | Best fit | The catch |
Cooling-off and escalation | Founders meet within set days, then refer the issue to named advisers or the board | Every company, as step one | It delays a decision; it doesn't make one |
Chair's casting vote | The chair breaks board ties, as the articles provide | Teams with an accepted lead founder | It hands that founder control |
Mediation or expert decision | A mediator helps settle; an expert decides a narrow question such as value | Disputes over numbers, not direction | A mediated deal binds only once signed |
Russian roulette (shotgun) | One founder names a price; the other must sell or buy at it | Founders with similar access to cash | Fails if the recipient can't pay; FEMA pricing with a non-resident |
Texas shoot-out | Both submit sealed bids; the higher bidder buys the other out | Founders who both want to stay | The same funding and FEMA risks |
NCLT petition | On an oppression petition, the Tribunal can order one side to buy out the other | When no clause works | A tribunal process, with a 10% threshold the Tribunal can waive |
Sources: sections 241, 242 and 244 of the Companies Act, 2013.
A worked example: the 50/50 shotgun
In a hypothetical Indian private company, Founders X and Y hold 5,000 of 10,000 shares each. When a board deadlock over a term sheet survives mediation, X triggers the shotgun at Rs 800 a share. Y has 30 days to elect and 60 to pay: sell Y's 5,000 shares to X for Rs 40,00,000, or buy X's for the same.
So who wins? A valuer puts fair value at Rs 1,200 a share, making Y's stake worth Rs 60,00,000. With about Rs 5,00,000 in cash, Y cannot raise Rs 40,00,000 in 60 days and must sell, giving up Rs 20,00,000. The shotgun favoured cash: X could safely name a low price.
The Income-tax Act, 2025 rules on below-value transfers apply too. Read literally, paras 8.2 and 8.3.1 of the RBI's Master Direction would let a non-resident Y sell at Rs 800 but not buy at it, making one of the clause's two elections unlawful. The fixes: a valuation-linked price floor, a longer funding window, a co-buyer or financier right, staged payment with security, and a trigger only after escalation.
When talks fail: arbitration, the NCLT and the dispute ladder
A dispute clause in the founders' agreement or SHA works best as a ladder:
The founders meet within a fixed number of days, each with a written proposal.
The issue goes to named advisers or the board, with a cooling-off period before any buy-sell trigger.
An agreed mediator or institution runs a mediation within a set time.
Contractual claims go to arbitration, with the seat, rules and number of arbitrators fixed in advance.
The clause expressly leaves statutory oppression and mismanagement claims to the NCLT.
Under section 241 of the Companies Act, 2013, a member can petition the Tribunal over affairs conducted in a manner prejudicial or oppressive to members. Section 244 requires 100 members, a tenth of members or a tenth of issued capital, unless the Tribunal waives it. Section 242(2)(b) lets it order other members or the company to buy a member's shares: the last resort for a founder trapped at 50/50.
The Supreme Court on 14 December 2020 (Civil Appeal No. 2402 of 2019) listed winding up of companies as non-arbitrable. The Bombay High Court on 20 August 2014 (Company Appeal (L) No. 10 of 2013), ruling under the 1956 Act, kept genuine oppression petitions out of arbitration unless they're "dressing up" to evade the clause. Contractual claims can go abroad: BharatPe's went to the Singapore International Arbitration Centre.
Making a founders' agreement and SHA enforceable in India
In India, a founders' agreement or SHA binds its signatories as an ordinary contract. Whether it also works against the company and in court turns on three things: whether its key terms are copied into the articles, whether it's stamped, and whether a clause collides with the Companies Act, section 27 or FEMA pricing.
Clause | Binds the signatories? | Put it in the articles? | The Indian catch |
Vesting call option on unvested shares | Yes | Yes | It's a share transfer, not a company buyback; below fair value, income tax can fall on both sides |
Leaver price at nominal value | Yes | Yes | Income-tax Act, 2025 ss.79 and 92(2)(m); FEMA if one party is non-resident |
ROFR, ROFO and lock-in | Yes | Yes | A private company refusing a transfer must give notice within 30 days (s.58(1)) |
Tag-along and drag-along | Yes | Yes | A non-resident can't be promised an assured exit price |
Reserved matters | Yes | Yes | Void where it cuts across the Companies Act (s.6) |
Non-compete while a shareholder | Yes | Optional | Enforceable while the SHA subsists (Delhi High Court, July 2025) |
Non-compete after exit | No: void under s.27 | - | Only a genuine sale of goodwill is an exception |
IP assignment | Yes | Optional | If silent, deemed five years and India only (Copyright Act s.19) |
Arbitration clause | Yes | Optional | Genuine oppression claims stay with the NCLT |
Sources: section 6 of the Companies Act, 2013.
Why SHA terms must be mirrored in the articles of association
The Supreme Court held on 28 November 1991 (AIR 1992 SC 453, (1992) 1 SCC 160): transfer restrictions missing from the articles are "not binding either on the shareholders or on the company". Section 6 of the Companies Act, 2013 puts the Act above the articles and the company's agreements, voiding repugnant terms. So an SHA doesn't override the articles, and unanimous signature doesn't make its transfer terms bind the company.
The 2013 Act's proviso to section 58(2) makes a contract about transferring securities "enforceable as a contract", but it sits in the public-company sub-section, and its reach to private companies is unsettled. According to Indian law-firm commentary, Bombay High Court division benches upheld pre-emption terms on public-company shares in 2010 and 2015, and the Supreme Court dismissed the appeals without a reasoned order.
Alter the articles by special resolution and file them with the Registrar within 15 days (section 14). Section 5(3)-(4) lets articles entrench named provisions behind more than a special resolution, but a private company can entrench only at formation or by an amendment all members agree to, so entrench at incorporation or at a round when everyone signs.
Stamp duty, e-signing and execution
Stamp duty on the agreement is state law, so rates vary; share transfers carry separate duty. Section 35 of the Indian Stamp Act, 1899 says an unstamped instrument cannot be admitted in evidence or acted upon until duty and a penalty (five rupees or ten times the duty or shortfall, whichever is more) are paid. States with their own stamp Acts have equivalents.
So is an unstamped agreement worthless? No. A seven-judge Supreme Court bench held on 13 December 2023 (2023 INSC 1066, Curative Petition (C) No. 44 of 2023) that such an agreement is inadmissible but not void or unenforceable, the defect is curable, and a stamping objection goes to the arbitral tribunal.
E-signing works: the Information Technology Act, 2000 excludes only its First Schedule documents (such as wills, trusts and powers of attorney), and a founders' agreement isn't one (duty still applies). Across borders, name the governing law, check FEMA pricing and stamp the Indian leg. Templates skip the articles and stamping; cost rises with founder numbers, cross-border parties and concurrent changes to the articles.
Founders' agreements in India, the US and the UK: what changes
Between India, the US and the UK, five things change in a founders' agreement or SHA: how vesting is taxed, post-exit non-competes, where transfer restrictions sit, company-level vetoes and court-ordered buyouts.
Issue | India | US | UK |
Vesting and tax | Reverse vesting by contract over issued shares; tax on transfers below fair market value | Restricted stock; an 83(b) election within 30 days of the transfer | Leaver terms often in the articles; a joint section 431 election within 14 days of acquisition |
Non-compete after exit | Void under section 27, except on a sale of goodwill | Void in California unless the founder sells all of their ownership interest; no federal FTC ban | Judged for reasonableness; reform under review |
Where transfer restrictions sit | The articles of association | Certificate of incorporation, bylaws or a stockholder agreement, noted conspicuously on the certificate (Delaware) | The articles, which are public at Companies House |
Company-level vetoes | The articles | Delaware lets a corporation contract for them with stockholders since 1 August 2024 | A company's own promise not to use a statutory power can't be enforced against it |
Court-ordered buyout | NCLT, sections 241-242 | Depends on state law and the agreement | Unfair-prejudice petition, sections 994-996 |
Sources: 26 U.S.C. 83(b), HMRC ERSM30450, California Business and Professions Code s.16601, the FTC's non-compete rule page, 8 Del. C. s.202 and s.122(18), Companies Act 2006 s.994 and s.996.
US founders: 83(b), Delaware and California
For restricted stock in a Delaware parent, the 83(b) election must be made "not later than 30 days after the date of such transfer", cannot be revoked without the IRS's consent, and goes on IRS Form 15620 or a written statement. Without it, each vesting tranche is taxed at its value when it vests. The form can now be submitted online through the IRS's mobile-friendly forms service.
A Delaware transfer restriction binds a buyer without actual knowledge only if noted conspicuously (section 202). After a February 2024 Court of Chancery decision struck down pre-approval rights (reversed in January 2026 on delay grounds, not validity), section 122(18), effective 1 August 2024, even for earlier contracts, let corporations grant them by contract. California voids non-competes unless the owner sells all of their ownership interest, and the FTC rule, set aside in August 2024, was removed on 12 February 2026; an LLC uses its operating agreement.
UK founders: the articles, the section 431 election and unfair prejudice
What's the UK's 83(b)? The joint section 431 election under the Income Tax (Earnings and Pensions) Act 2003, due within 14 days of acquisition. Section 33 of the Companies Act 2006 makes the constitution bind the company and its members as if each had covenanted to observe it.
The House of Lords held in 1992 ([1992] 1 WLR 588) that a company's own SHA promise not to use a statutory power cannot be enforced against it, though members' voting promises among themselves are valid. A pushed-out minority founder can petition for unfair prejudice (section 994), and the court can order a share purchase (section 996(2)(e)). Non-compete reform is under review: the Department for Business and Trade's November 2025 working paper, closed 18 February 2026, floated a statutory time limit or a ban for employees.
Frequently asked questions about founders' agreements
Is a shareholders' agreement mandatory in India?
No. The Companies Act, 2013 doesn't require one; an SHA is an ordinary contract under the Indian Contract Act, 1872, binding only its signatories. In a private company, its transfer restrictions should also be written into the articles, or they won't bind the company.
Does a shareholders' agreement override the articles of association?
No. Section 6 of the Companies Act, 2013 puts the Act above both the articles and the company's agreements, and the Supreme Court held in 1991 that share-transfer restrictions missing from the articles bind neither the shareholders nor the company. Amend the articles to match the SHA.
What is reverse vesting?
It's vesting applied to shares a founder already owns. The shares are issued upfront, and the SHA and articles give the co-founders or a nominee an option to buy the unvested portion if the founder leaves, at a nominal price or a pre-agreed percentage of fair market value.
Does a founders' agreement need to be stamped in India?
Yes, under the stamp law of the state concerned, so rates vary by state. An unstamped agreement cannot be admitted in evidence until the duty and a penalty are paid, but the Supreme Court held in December 2023 that it isn't void: the defect can be cured.
Can a founders' agreement be signed electronically?
Yes. The Information Technology Act, 2000 excludes only the documents in its First Schedule, such as wills, trusts and powers of attorney, and a founders' agreement isn't one of them. Stamp duty still applies under state law.
Does an IP assignment in India need to state its duration and territory?
It should. Under section 19 of the Copyright Act, 1957, an assignment that states no period is deemed to last five years, one that names no territory is presumed to cover only India, and rights not exercised within a year lapse unless it says otherwise.
What is a vesting cliff?
The cliff is the period before any shares vest. On the common four-year schedule with a one-year cliff, a founder who leaves in the first year vests nothing, 25% vests at the one-year mark, and the rest vests monthly at 1/48th of the total.
What happens to a co-founder's shares if they leave before the cliff?
If the agreement has vesting, none of their shares have vested, so every share falls under the leaver terms. Without a vesting or leaver clause, the shares stay theirs, because shares are the holder's movable property under section 44 of the Companies Act, 2013.
What is an 83(b) election, and when is it due?
It's a US tax election that lets a founder be taxed on restricted stock when it's issued rather than as it vests. It must be made within 30 days of the transfer, on IRS Form 15620 or a written statement, and cannot be revoked without the IRS's consent.
Can I write my own shareholders' agreement?
You can, but templates tend to skip the Indian mechanics. Transfer, leaver and drag terms should also go into the articles by special resolution, the SHA needs stamping under state law, and a clawback at nominal value can be taxed on both sides.
What is the difference between a good leaver and a bad leaver?
A good leaver leaves for reasons the agreement treats as blameless, such as death, incapacity or dismissal without cause, and unvested shares are typically bought back at fair market value. A bad leaver leaves for cause or in breach and typically gets a lower price, such as nominal value or cost.
What is the difference between drag-along and tag-along rights?
Drag-along lets holders of an agreed majority force the other shareholders to sell to a buyer on the same terms. Tag-along lets minority shareholders join a sale by the majority on the same terms. In an Indian private company, both belong in the articles as well as the SHA.
What is a shotgun clause, and when does it fail?
In a shotgun (Russian roulette) clause, one founder names a price and the other must sell or buy at that price. It fails when the recipient cannot fund a purchase, and with a non-resident founder, FEMA pricing can make one direction unlawful.
Can a shareholder dispute go to arbitration instead of the NCLT?
Contractual claims can. Genuine oppression and mismanagement petitions under sections 241 and 242 of the Companies Act, 2013 stay with the NCLT: in 2014 the Bombay High Court, ruling under the 1956 Act, kept them out of arbitration unless dressed up to evade the clause.
Can a non-compete stop a co-founder from starting a rival company?
While they remain a shareholder bound by the SHA, it can: in July 2025 the Delhi High Court dismissed an appeal against an interim award enforcing one. After exit, section 27 of the Indian Contract Act, 1872 generally makes it void unless the exit was a genuine sale of goodwill.
What happens to a founder's shares if the founder dies?
A nominee under section 72 of the Companies Act, 2013 takes them, but the Supreme Court held in December 2023 that the nominee holds for a limited purpose; succession law decides the owner. Without a fair-value call option on death and transmission limits in the SHA and articles, heirs keep them.
Should co-founders split equity 50/50?
It's increasingly common: Carta found 44.6% of two-founder teams formed in 2025 split equally, the highest point of the past decade. An equal split needs vesting and a deadlock clause, because it gives no one a deciding vote and, without vesting, hands half the company to whoever leaves first.
References
Legislation, regulations and official guidance come first, grouped by issuing body; statutory text is as published on the host each entry links to.
Parliament of India, Companies Act, 2013, section 2(68) (definition of a private company).
Parliament of India, Companies Act, 2013, section 5 (articles; entrenchment in sub-sections (3) and (4)).
Parliament of India, Companies Act, 2013, section 6 (Act to override the memorandum, the articles and agreements executed by the company).
Parliament of India, Companies Act, 2013, section 14 (alteration of articles; filing with the Registrar within fifteen days).
Parliament of India, Companies Act, 2013, section 44 (shares as movable property).
Parliament of India, Companies Act, 2013, section 58 (refusal of registration and appeal against refusal; the proviso to sub-section (2)).
Parliament of India, Companies Act, 2013, section 68 (power of a company to purchase its own securities; modes in sub-section (5)).
Parliament of India, Companies Act, 2013, section 72 (power to nominate).
Parliament of India, Companies Act, 2013, section 241 (application to the Tribunal for relief in cases of oppression and mismanagement).
Parliament of India, Companies Act, 2013, section 242 (powers of the Tribunal, including an order to purchase a member's shares).
Parliament of India, Companies Act, 2013, section 244 (right to apply under section 241, and the Tribunal's power to waive the threshold).
Parliament of India, Copyright Act, 1957, section 17 (first owner of copyright).
Parliament of India, Copyright Act, 1957, section 18 (assignment of copyright; future works, and media not in use when the assignment was made).
Parliament of India, Copyright Act, 1957, section 19 (mode of assignment; the one-year lapse and the five-year and India-only defaults).
Parliament of India, Income-tax Act, 2025, section 79 (fair market value deemed the full value of consideration for unquoted shares; formerly section 50CA of the Income-tax Act, 1961).
Parliament of India, Income-tax Act, 2025, section 92(2)(m) (property received for inadequate consideration; formerly section 56(2)(x) of the Income-tax Act, 1961).
Parliament of India, Indian Contract Act, 1872, section 10 (what agreements are contracts).
Parliament of India, Indian Contract Act, 1872, section 27 (agreement in restraint of trade void, and the sale-of-goodwill exception).
Parliament of India, Indian Stamp Act, 1899, section 35 (instruments not duly stamped inadmissible in evidence).
Parliament of India, Indian Stamp Act, 1899, Schedule I, Article 56A (duty on the issue and transfer of securities).
Parliament of India, Information Technology Act, 2000, section 1(4) and the First Schedule (documents to which the Act does not apply).
Parliament of India, Specific Relief Act, 1963, section 15(h) (a company's right to enforce its promoters' pre-incorporation contract).
Parliament of India, Specific Relief Act, 1963, section 19(e) (a company bound by its promoters' pre-incorporation contract).
Ministry of Corporate Affairs, Companies (Prospectus and Allotment of Securities) Rules, 2014, Rule 9B (securities of private companies in dematerialised form; the link opens the Ministry's website, which publishes the rules).
Reserve Bank of India, Master Direction - Foreign Investment in India, as updated up to 15 June 2026, paragraphs 8.2, 8.3.1 and 8.3.2 (pricing guidelines on transfers).
United States Congress, 26 U.S.C. 83 (property transferred in connection with the performance of services; the election in subsection (b)), text via the Legal Information Institute.
Internal Revenue Service, Form 15620, Section 83(b) Election (Rev. 4-2025).
Internal Revenue Service, Mobile-friendly forms: Form 15620 (online submission of the section 83(b) election).
Federal Trade Commission, Noncompete Rule, rule status page.
US Securities and Exchange Commission (EDGAR), Snap Inc. Form S-1 registration statement, February 2017, notes to the consolidated financial statements.
State of California, Business and Professions Code, section 16601 (an owner selling all of their ownership interest may agree not to compete).
State of Delaware, Delaware Code, Title 8, section 122(18) (contracts with stockholders), effective 1 August 2024.
State of Delaware, Delaware Code, Title 8, section 202 (restrictions on transfer of securities).
UK Parliament, Companies Act 2006, section 33 (effect of company's constitution).
UK Parliament, Companies Act 2006, section 994 (petition by company member on unfair prejudice).
UK Parliament, Companies Act 2006, section 996 (powers of the court, including an order to purchase a member's shares).
HM Revenue and Customs, Employment-Related Securities Manual, ERSM30450 (restricted securities: elections under section 431 of the Income Tax (Earnings and Pensions) Act 2003).
Department for Business and Trade, Working paper on options for reform of non-compete clauses in employment contracts, November 2025 (responses closed 18 February 2026).
Judgments follow, newest first, cited by court, date and case number or citation; entries 6, 11 and 12 are named in the text without a link.
Bombay High Court, 21 January 2026, 2026:BHC-OS:1561 (interim measures to enforce a non-compete in an asset purchase agreement refused).
Delhi High Court, 28 July 2025, ARB. A. (COMM.) 5/2025 (appeal against an interim award enforcing an SHA non-compete dismissed).
Delhi High Court, 25 June 2025, FAO 167/2025 (non-compete held void after employment ends).
Supreme Court of India, 14 May 2025, 2025 INSC 691 (restrictive covenant operating during the contract upheld).
Delhi High Court, 4 December 2024, O.M.P.(I) (COMM.) 385/2024 (interim relief to enforce a joint-venture SHA non-compete refused).
Delaware Court of Chancery, 23 February 2024, C.A. No. 2023-0309 (pre-approval rights in a stockholder agreement held invalid; reversed on laches grounds by the Delaware Supreme Court on 20 January 2026, No. 340, 2024).
Supreme Court of India, 14 December 2023, 2023 INSC 1076, Civil Appeal No. 7107 of 2017 (a nominee of shares holds for a limited purpose; succession law decides ownership).
Supreme Court of India, seven-judge bench, 13 December 2023, 2023 INSC 1066, Curative Petition (C) No. 44 of 2023 (unstamped agreements inadmissible but not void).
Supreme Court of India, 14 December 2020, Civil Appeal No. 2402 of 2019 (tests of non-arbitrability).
Bombay High Court, 20 August 2014, Company Appeal (L) No. 10 of 2013 (oppression petitions under the Companies Act, 1956 and arbitration).
Supreme Court of India, 2006, (2006) 4 SCC 227 (a covenant in restraint of trade operating beyond the contract's term void under section 27), as quoted by the Delhi High Court on 28 July 2025.
House of Lords, 1992, [1992] 1 WLR 588 (a company's undertaking in a shareholders' agreement not to exercise a statutory power unenforceable against it).
Supreme Court of India, 28 November 1991, AIR 1992 SC 453, (1992) 1 SCC 160 (share-transfer restrictions missing from the articles bind neither the shareholders nor the company).
Data and research come next, most recent first.
Carta, Dynamic duos: two-founder teams are divvying up their equity more equally than ever, 18 June 2026.
Y Combinator Startup Library, How to split equity among co-founders (undated).
Princeton University Press, The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup, 2012, research from Harvard Business School (the linked page is the paperback edition).
Press reports are cited in the text by outlet and date, without a link.
Outlook Business, 30 September 2024, report on BharatPe's settlement with its former co-founder.
PTI, 9 December 2022, report on BharatPe's Singapore International Arbitration Centre claim over a former co-founder's unvested shares.
Disclaimer
This article is for educational and general business information purposes only and does not constitute professional legal, financial or tax advice. Company, tax and exchange-control rules change, so take advice from a qualified professional before signing or amending a founders' agreement or shareholders' agreement.
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