The Standard Indian Tech Co-founder Vesting Agreement: 5 Loops to Watch Out For

Most Indian tech founders sign a vesting arrangement within a few months of incorporating — often because an angel or an accelerator asks for one. The first draft usually arrives as a US-style “restricted stock” template with Indian names typed in. It reads well, but several of its mechanics do not work the same way under Indian company, tax and foreign-exchange law. Drafts then go back and forth on the same points: a “loop”. This teardown walks through the five loops we see most often and what a workable Indian position looks like.

Vesting for founders in India is almost always reverse vesting: the founder already owns the shares from day one, and the agreement gives the company or the other founders a right to take back the unvested portion if the founder leaves early. Four years with a one-year cliff is a common starting point, but nothing in Indian law fixes those numbers — the founders and investors agree them.

Loop 1: “The company will buy back the unvested shares”

This line is lifted straight from US templates, where a company repurchases unvested stock at cost. In India a company cannot simply buy its own shares whenever a founder leaves. A buy-back under Section 68 of the Companies Act, 2013 has conditions — it must come out of free reserves, securities premium or proceeds of another issue, it needs board or shareholder approval depending on size, it is limited in amount, and there are gaps required between buy-backs. Capital reduction under Section 66 needs a tribunal process. Neither is a practical tool for taking back a few thousand shares from a departing co-founder.

The workable Indian mechanism is a transfer: the departing founder is obliged to transfer the unvested shares to the remaining founders, to a nominee, or to an employee welfare trust, at a price stated in the agreement. Write the mechanism as a call option with a clear notice period, a completion date and a power of attorney (or a share-transfer form held in escrow) so the transfer can be completed if the founder does not cooperate.

Loop 2: The price for unvested shares

Templates often say unvested shares are transferred “at par” or “at the original subscription price”. That keeps the departing founder from profiting on shares they did not earn, but it collides with two rules. First, under the income-tax law a person who receives shares of an unlisted company for less than their fair market value can be taxed on the difference as income (Section 56(2)(x) of the Income-tax Act, 1961; the Income-tax Act, 2025, in force from 1 April 2026, carries a corresponding rule — check the current section with your tax adviser). If the company has raised money at a high valuation, the gap between par value and fair value can be large. Second, if either party is a non-resident, the transfer must respect the pricing guidelines under the foreign-exchange (non-debt instruments) rules — a resident cannot normally buy from a non-resident above fair value or sell to one below it.

Close the loop by agreeing the price as the higher of the founder's cost and a stated floor, by considering who bears any tax on a below-value transfer, and by routing transfers involving non-residents through a valuation report. The free workbook below shows the “gap to fair value” for each leaver scenario so the conversation happens with numbers, not adjectives.

Loop 3: Good leaver, bad leaver — and who decides

The commercial heart of the agreement is what a founder keeps if they leave. A common structure: a good leaver keeps everything vested and loses only the unvested part; a bad leaver also loses some or all vested shares, or must sell them at a discount. Drafts loop when “bad leaver” is defined loosely — “any termination for cause as determined by the board” — because the founder being removed may be outvoted on the board that decides.

• Make bad-leaver events a closed list: fraud, wilful misconduct, a material breach not cured within a stated period after written notice, conviction for an offence involving dishonesty, joining a competitor while still a founder.
• Say who decides and how the founder can challenge it — typically arbitration under the agreement.
• Treat resignation separately: many founder agreements make a resignation before the cliff a bad-leaver event and after the cliff a good-leaver event.
• Death and permanent incapacity should be good-leaver events, with the estate keeping vested shares.

Loop 4: The agreement says one thing, the Articles say another

In India, restrictions on transferring shares and rights such as call options are generally enforceable against the company and other shareholders only if they are written into the Articles of Association. The Supreme Court's decision in V.B. Rangaraj v. V.B. Gopalakrishnan (1992) is still cited for the point that a private agreement restricting share transfers, not reflected in the Articles, does not bind the company. Later decisions have softened this for agreements the shareholders themselves signed, but investors and their counsel will insist on amended Articles anyway.

So the vesting agreement should come with: a special resolution amending the Articles to include the transfer restrictions and the call option; the board's undertaking not to register transfers in breach; and a clause that if the Articles and the agreement conflict, the shareholders will vote to amend the Articles.

Loop 5: IP assignment and non-compete

Investors want everything the founder built for the business owned by the company. Under the Copyright Act, 1957, an assignment must be in writing and should state the rights, the duration and the territory; if the duration is not stated it is treated as five years, and if the territory is not stated it is treated as India (Section 19). A founder is often not an employee in the early months, so the “work made in the course of employment” rule does not help. Use a present assignment (“hereby assigns”) of all work created for the business, including before incorporation, for the full term of the rights and worldwide.

Non-compete clauses loop for the opposite reason: they are written too wide. Section 27 of the Indian Contract Act, 1872 makes agreements in restraint of a lawful profession or trade void, and courts have generally refused to enforce restraints that operate after a person leaves. Restrictions while the founder is still a shareholder-employee, confidentiality obligations and narrowly drawn non-solicitation clauses are on firmer ground. Use those instead of a three-year, all-India ban that a court is unlikely to enforce.

Cliff, acceleration and the arithmetic

Two more points come up in almost every negotiation. The cliff: nothing vests before it, and at the cliff the months served vest together — so a founder leaving one day before a 12-month cliff keeps nothing. Make sure the start date is right (incorporation, or the date the founder went full-time). Acceleration: on a sale of the company, single-trigger acceleration vests some or all unvested shares on the sale itself; double-trigger acceleration needs both a sale and the founder's termination within a period afterwards. Acquirers prefer double-trigger because it keeps founders in place after the deal.

The workbook's vesting schedule shows vested and unvested shares month by month from your settings, and the leaver sheet calculates what each scenario leaves the founder with and the gap to fair value — useful before a negotiation call.

A clean-up checklist before you sign

1. Reverse vesting written as a transfer obligation, not a buy-back.
2. Transfer price agreed, with tax on below-value transfers and FEMA pricing considered.
3. Bad-leaver events listed exhaustively; a dispute route the departing founder can use.
4. Articles amended by special resolution to mirror the restrictions.
5. A present, written IP assignment with term and territory; confidentiality and non-solicit instead of a broad non-compete.
6. Cliff, start date and acceleration trigger checked against the schedule.