How to Draft a Clear Co-founder’s Agreement

Most startups begin with trust, shared ambition, and the energy of building something new. What sustains that momentum over time is clarity. A co-founder’s agreement provides that clarity by setting out how founders work together, make decisions, and handle difficult moments before they arise, often with the support of structured legal drafting that brings structure and consistency to the process.

This agreement is not a sign of mistrust. It is a practical tool that records expectations, protects effort, and reduces the risk of disputes as the business grows.

This blog explains what a co-founder’s agreement is, why it matters, and when it should be drafted. It then walks through the key clauses every founder agreement should include, from roles and equity to decision-making, exits, confidentiality, and dispute resolution, with a focus on legal enforceability under Indian law.

What Is A Co-founder’s Agreement?

A co-founder’s agreement is a private contract between the founders of a business. It sets out ownership, roles, decision-making rules, and exit terms. It is usually signed before incorporation or alongside it.

Once executed, it becomes the reference point for how founders work together, resolve disagreements, and handle change. Courts and investors treat it as evidence of founder’s intent, internal understanding and structure.

Why A Co-founder’s Agreement Matters

Many startups fail due to internal disputes, not market failure. Most of those disputes start small.

A well-drafted agreement helps avoid:

• Confusion around equity ownership
• Disputes over authority and control
• Problems when a founder stops contributing
• Deadlocks in key decisions
• Uncertainty if someone exits early

It forces honest discussions at the right time. Silence now becomes conflict later.

When Should You Draft One?

It is best to put the agreement in place early. Ideally, the agreement is signed before money is raised and before the company takes on external obligations. Waiting until conflict arises defeats the purpose.

Founders tend to agree most easily before pressure sets in. That is when terms are clearer and trust still holds.

Key Steps To Draft A Clear Co-founder’s Agreement

Step 1: Start With A Shared Understanding

Before you write a single clause, align on the basics. Founders should agree on:

• Why the business exists
• What success looks like in the next three to five years
• Whether this is a full-time commitment

These points do not always sit inside the agreement, but they shape every clause that follows. Misalignment here leads to weak drafting later.

Step 2: Clearly Define Founder Roles

Do not rely on job titles alone. Set out each founder’s responsibilities in plain language. The agreement should clearly cover:

• Areas of operational responsibility, such as finance, product, operations, or sales
• Decision-making authority for each area
• Reporting lines and accountability
• Day-to-day expectations and time commitment

Where authority is shared, specify:

• Which decisions require joint approval
• How disagreements are resolved
• When matters are escalated

It is also important to recognise the company’s legal structure.

• After incorporation, statutory powers vest with the Board of Directors under the Companies Act, 2013.
• Founder role descriptions must function within this framework and should not conflict with board authority or shareholder rights.

Clear role definitions reduce informal power struggles and help prevent disputes as the company grows.

Step 3: Set Out Equity Ownership Properly

Equity is where most founder disputes begin, so the shareholding pattern needs to be set out with precision. The agreement should then explain how that equity is earned, retained, and protected over time. It must cover:

• The initial equity split between founders
• Vesting schedules and any cliff periods
• The treatment of unvested shares if a founder exits early

It is important to address vesting with legal precision.

• Indian company law does not automatically recognise vesting unless it is implemented through enforceable mechanisms.
• Vesting must be structured through one or more of the following:
  • A shareholders’ agreement
  • Share subscription or share issuance arrangements
  • Buyback or share transfer provisions that comply with the Companies Act

Many of these rights are tied to reserved matters, voting rights, and transfer restrictions, which are typically set out in a shareholders’ agreement alongside vesting provisions.

A clear understanding of how such matters operate helps ensure equity arrangements remain enforceable as the company grows. You can read more about this in our detailed guide on reserved matters in shareholders’ agreements.

Avoid equal splits by default unless contributions genuinely match. Courts and investors expect a clear commercial rationale behind ownership, not convenience.

Step 4: Establish Decision-Making Rules

Every company faces decisions that test founder relationships, and the agreement should clearly define how those decisions are taken, including:

• Matters requiring unanimous consent
• Matters that can be decided by majority
• Situations where a founder has veto rights

It should also set out a clear process for deadlocks, such as:

• Escalation to mediation
• Casting or tie-breaker votes
• Exit or buy-sell triggers in extreme cases

At the same time, decision-making provisions must respect statutory limits.

• Certain matters are reserved under the Companies Act, 2013 and must be decided in the manner prescribed by law.
• Private agreements cannot override statutory board or shareholder powers.

Many of these decision-making thresholds later appear as key clauses in a shareholders’ agreement, especially once investors are involved. Learn about all the clauses to include in the agreement in our detailed guide: Key Clauses to Include in your Shareholders’ Agreement

Clarity here prevents informal power struggles and reduces the risk of paralysis when difficult decisions arise.

Step 5: Document Capital And Expense Commitments

Founders often assume equal financial risk. That assumption should be tested and written down. To keep everyone aligned, always clarify:

• Initial capital contributions
• Future funding obligations
• Treatment of founder loans and reimbursements

This avoids confusion when cash flow tightens or unexpected expenses arise.

Step 6: Address Exit And Separation Scenarios

A good agreement plans for exits calmly, not emotionally. The agreement should clearly cover:

• Voluntary exit by a founder
• Removal for cause
• Long-term inactivity or non-performance

For each scenario, define what happens to the founder’s shares. Good leaver and bad leaver concepts help distinguish fair exits from situations that harm the business.

To ensure the terms are enforceable, exit outcomes must be supported by properly drafted share transfer or buyback clauses and a clear valuation method that complies with company law. Without clear exit rules, negotiations often become personal, slow, and expensive.

Without clear exit rules, negotiations quickly turn personal, time-consuming, and expensive.

Founder exit provisions often tie in with shareholder exit rights, such as drag-along and tag-along clauses. These decide when founders must sell their shares or can exit alongside other shareholders. Knowing how these rights work helps avoid surprises during acquisitions or investor exits. You can read more in our guide on drag-along and tag-along rights in shareholder agreements.

Step 7: Include Confidentiality And IP Clauses

Founders often create significant value before the company is formally incorporated. The agreement should clearly confirm that:

• All intellectual property created by founders, whether before or after incorporation, belongs to the company
• Founders must not use or disclose confidential information outside the business
• Competing activities are restricted during the period of association with the company

While non-compete obligations are often discussed at the founder stage, they must be drafted carefully under Indian law.

• Post-exit non-compete restrictions are generally unenforceable in India.
• As a result, non-compete obligations in founder agreements are usually limited to the period of association with the company.

To understand how non-compete agreements work in India and where the law draws the line, you can refer to our guide on non-compete agreements in India.

These clauses exist to safeguard the company’s assets and continuity, not individual egos.

Step 8: Add Dispute Resolution And Governing Law

Disputes may still happen, so the agreement should outline:

• The governing law
• Jurisdiction
• Mandatory mediation or arbitration steps

A defined process reduces time, cost, and damage when disagreements arise.

Step 9: Keep The Language Practical

Avoid legal clutter. A good co-founder’s agreement is readable. Has short sentences, clear headings, and defined terms only where needed.

If founders cannot understand their own agreement, it will not guide behavior when it matters most.

Step 10: Review And Sign At The Right Time

Do not rush into signing. Circulate drafts, invite questions, and address any concerns before the agreement is executed.

Once it is signed, treat it as a living document and update it whenever roles, ownership, or strategy change.

Common Legal Drafting Mistakes To Avoid

• Copying templates without context
• Ignoring vesting provisions
• Leaving exit scenarios undefined
• Overloading the document with generic clauses
• Treating the agreement as a formality

Most disputes come from what was not discussed, not what was written poorly.

Conclusion

Drafting a co-founder’s agreement is one of the few chances founders get to set rules calmly. Getting it right early protects time, relationships, and value later.

Clear agreements do not slow startups down. They remove friction so founders can focus on growth instead of conflict.

At LegalWiz, we support founders at this stage through our online legal drafting services, helping ensure co-founder agreements reflect both commercial reality and legal enforceability. When drafted carefully, this document becomes a quiet strength that supports the company as it grows.