The short version
- Never grant 100% upfront unconditional equity on day one; implement a 4-year vesting schedule with a 1-year cliff.
- All pre-incorporation and future intellectual property must be explicitly assigned to the company, not held personally.
- Distinguish clearly between 'Good Leaver' and 'Bad Leaver' scenarios for share repurchase rights.
- Establish tie-breaking mechanisms (mediation, independent director casting vote) to prevent deadlocks in 2-founder companies.
Why a handshake agreement fails when money arrives
When starting out, founders share an unspoken bond of trust and long hours. But if one founder steps back after 6 months while retaining 50% of the company's equity, the remaining founders are left running the company for an inactive shareholder.
New institutional investors will rarely invest in a startup with dead equity on its cap table. A signed co-founders' agreement establishes expectations, deliverables, and clean departure paths before valuation and real stakes complicate relationships.
The standard 4-year vesting schedule with a 1-year cliff
The venture capital industry standard across India is 4-year linear monthly vesting with a 12-month cliff. Here is how the mechanics work in practice:
- The 1-Year Cliff: If a co-founder leaves or is terminated before completing 12 full months, they walk away with 0% vested equity. Their unvested shares are repurchased by the company or surrendered.
- Post-Cliff Vesting: At the completion of Month 12, exactly 25% of their total equity allocation vests immediately.
- Monthly Accrual: The remaining 75% vests in equal monthly increments (approx. 2.08% per month) across the remaining 36 months.
- Reverse Vesting: In Indian Private Limited companies, founders legally hold the shares upfront, subject to a contractual right of repurchase by the promoters or company if they leave before full vesting.
Good leaver vs bad leaver share transfer
A robust agreement defines what happens to vested shares upon exit depending on the nature of the departure:
- Good Leaver: Leaving due to permanent illness, mutual consent, or redundancy. The departing founder typically retains their vested shares, or the company repurchases them at independent Fair Market Value (FMV).
- Bad Leaver: Termination for gross misconduct, material breach of confidentiality, fraud, or joining a direct competitor. The company typically retains the right to claw back all unvested shares and buy back vested shares at face value (e.g., ₹10 per share).
IP assignment: Why investors reject unassigned code
Under the Indian Copyright Act, 1957, software code and designs authored by an individual remain their personal property unless there is a written assignment deed transferring ownership to the company.
Your co-founder agreement must contain an explicit 'Assignment of Inventions and Intellectual Property' clause. This ensures every line of code, patentable invention, and brand asset created before and after incorporation belongs irrevocably to the company entity.
Resolving deadlocks in 50/50 setups
Two-founder companies with equal 50/50 shareholding are prone to corporate paralysis whenever a strategic disagreement arises. Practical resolution mechanisms include:
- Domain allocation: Assigning the final casting vote on product and engineering to the CTO, and on sales, fundraising, and finance to the CEO.
- Independent advisor tie-breaker: Naming a respected mentor or lead angel whose decision is binding in unresolved deadlocks.
- Russian Roulette / Buy-Sell: One founder makes an offer to buy the other's shares at price X per share; the other founder must either accept the offer to sell or buy the first founder out at the exact same valuation.
This guide is general information, not legal or tax advice. Rules and fees change often, so check with an advisor before you file anything.