This document summarizes the key points of a presentation on founders' agreements for startups. It discusses why such agreements are important to establish expectations and avoid future disputes between founders. The constituents of an effective agreement are outlined, including standard terms, board structure, contributions, vesting, intellectual property, and termination. Issues like ownership and transfer of shares, jurisdiction, and non-compete clauses are also addressed. The presentation emphasizes that founders' agreements should be in writing and properly executed to be legally enforceable.

1. Founders’ Agreements
A Critical Start for a Start-Up
By Naina Krishna Murthy
Managing Partner
Krishnamurthy & Co.
Monday, 28th October, 2013

2. Agenda
o The three questions on Founders’ Agreement
o The constituents of a Founders’ Agreement
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Standard Terms
Board Constitution
Contributions
Vesting and Control
Transfer Restrictions
Intellectual Property Rights and Promoter Covenants
Termination and Jurisdiction
o Watch Out Issues
o Questions?

3. QUICK POLL
How many Entrepreneurs in the room believe
that a Founders’ Agreement executed orally
is legally enforceable?

4. The Three Questions on Founders’ Agreements
What is a Founders’ Agreement: A contract between
founders/promoters of a business
ooutlining mutual understanding and setting out
expectations of each party
ostreamlining investment and distribution of money and
highlighting roles, responsibilities and obligations of
each party
Why do we need a Founders’ Agreements:
o to record understanding in order to avoid any
ambiguity in future
o to set expectations, align goals and assign
responsibilities

5. The Three Questions on Founders’ Agreements
oTo provide for contribution, allocation and distribution
of resources
oTo pre-empt possible hurdles and identify ways to
tackle them
When to enter into a Founders’ Agreement:
oIdeation stage
oIncorporation stage
oCapitalization stage
It is Advisable to enter into a written agreement to avoid ambiguity in
enforcing oral contracts. Further, the agreement should ideally be
entered into at the incorporation stage since there would be some
amount of investment of time and money by then.

6. QUICK POLL
Can an investor force a founder to sell his/her
shareholding in the start up?

7. The constituents of a Founders’ Agreements
oStandard Terms of a Founders’ Agreement
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Equity Investment and Capital Structure
Board Management and Deadlock
Shareholders’ Meeting
Fresh Issue and Transfer Restrictions
Vesting
Business, Business Plan, Accounts and Policies
Confidentiality, Non-compete and Non-solicit
Representation and Warranties
Indemnity
Termination and Consequences
Governing Law and Dispute Resolution
Boiler Plates

8. Board Constitution
oOptimum Board Structure - a balancing act
•What should be the size of the Board/Odd number
structures
•Will all the founders be on the Board
•Who will be the Chairman of the Board and will the
Chairman have veto rights
•Unanimous Voting Rights
• Advisable to have a legal entity in place before money and business
ideas are brought to the table
• Company is a commonly preferred structure

9. QUICK POLL
Does the Indian legal system allow individuals to take an
equity stake in a start up by making contributions in kind?

10. Contribution
oContribution – Nature and Nurture
•Employee or shareholder or both
•What will be the form of contribution by a
founder – cash or kind
•How would you value non cash
contribution
•How will the shareholding be distributed
amongst founders
•How much are the founders willing to
dilute in the future
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Minimum shareholding/capitalization requirements under the law
Valuation of assets/intangibles important from tax perspective
Incase of foreign founders, contribution has to be in cash or
against lump-sum payment/royalty

11. QUICK POLL
Can an angel investor with 10% shareholding, prevent a
start up from taking money from a VC in the next round?

12. Vesting and Control
oOwnership / Control - Shareholding Control
•Will all shares be allotted upfront or will there be
milestones based on which shares are vested
•What are the different possible dilution events
•What is the extent of dilution
•Should a shareholder be given veto rights
•Pre-emptive rights
•Enforceability
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Control rights available under the law at different levels of
shareholding (Discussed in the next slide)
Minority shareholders are given protection under law

13. Vesting and Control
Shareholding
Level of control over Indian Company
<10%
A derivative action in the name of the shareholder to the Court of Law
on behalf of the Company.
10% - 25%
Minority protection rights for relief against oppression and
mismanagement.
25.01% 49.99%
Can block matters requiring a special resolution (75% voting in
favour), which include alteration of Charter Documents, amalgamation
and mergers, preferential issues of shares, other rights stipulated in
the Articles.
50%
Can block all resolutions requiring approval of shareholders by
ordinary resolution.
50.01% 74.99%
Has majority rights and control over matters requiring ordinary
resolution (simple majority), which include the appointment of
directors, declaration of dividends, appointment of auditors, issue of
shares on a rights basis, etc.
75% - 89.99%
Has the ability to pass both ordinary and special resolutions.
90.01%
Has effectively full control since minority protection is generally
available to shareholders holding 10% or more shareholding.

14. Transfer Restrictions
o Restrictions on transferability
• Should there be a lock-in?
• What happens if a founder wants
to sell his stake?
• Right of First Refusal/Offer
• Tag Along Rights
• Drag Along Rights
• Transfer upon death or termination
of Agreement
In case of private limited companies, these are contractual rights

15. QUICK POLL
How many Founders here think that the
ownership of the IP developed by the
founder/employee of a start-up, will vest in
the start up?

16. Intellectual Property Rights & Promoter
Covenants
oIntellectual Property Rights
• Protection
• Ownership
oPromoter Covenants
• Exceptions
• Non Compete Obligations
• Compensation (whether cash or past
considerations)
• Restriction as an employee vs. founder
• Non-solicitation

17. Jurisdiction and Termination
oJurisdiction and Termination
• Jurisdiction of the Founders’ Agreement
• Modes of Dispute Resolution
• Circumstances for Termination
• Consequences of Termination
• Asset distribution post Termination
• Restrictive Covenants
• Winding up proceedings could be time consuming
• Enforceability of non-compete restrictions amongst shareholders
• Distribution of capital

18. Watch-Out Issues
oEnsure that contract is valid and properly executed
oExpressly provide for consideration
oStamp the contract with applicable stamp duty
oProvide for severability of clauses not recognized
under Indian laws
oIncorporate provisions into Articles of Association
In case any party executing is a corporate entity, ensure that the entity
has appropriate authority to enter into contract.

20. THANK YOU
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