Step-by-Step Guide
9 Steps
How to Create a Shareholders Agreement in India (With Template)
Comprehensive guide on how to create a shareholders agreement (SHA) in India. Covers key clauses, founder agreements, anti-dilution rights, drag-along and tag-along provisions, share transfer restrictions, exit mechanisms, and SHA vs AoA differences for 2026.
Quick Overview
Estimated Cost
₹15000
Time Required
7 to 14 Days
Total Steps
9 Steps
What You'll Need
Documents Required
- Memorandum of Association (MoA) and Articles of Association (AoA) of the company
- Certificate of Incorporation of the company
- PAN and Aadhaar of all shareholders who are parties to the agreement
- Company PAN and CIN details
- Shareholding pattern showing the number and class of shares held by each shareholder
- Board resolution authorising the company to enter into the shareholders agreement
- Existing agreements between shareholders (if any), including earlier SHAs, term sheets, or investment agreements
- Valuation report of the company (if the SHA involves investment or share issuance)
- Identity proof and address proof of all parties
- Details of intellectual property, key contracts, and material assets of the company
Tools & Prerequisites
- Legal counsel experienced in corporate law and shareholder agreements
- Company incorporation documents from MCA portal (mca.gov.in)
- Stamp paper (physical or electronic) for executing the agreement as per state stamp duty rates
- Notary or witness for attestation of signatures
- Digital signature certificates if executing electronically
A shareholders agreement is one of the most important legal documents for any company with multiple shareholders. It defines the rules of engagement between shareholders, protects minority and majority rights, establishes governance mechanisms, and provides clarity on what happens when things go wrong. Whether you are a startup founder splitting equity with co-founders, a company raising investment, or partners setting up a joint venture, a well-drafted shareholders agreement is essential.
This guide covers everything you need to know about creating a shareholders agreement in India. We will walk you through the key clauses, explain complex concepts like anti-dilution and drag-tag rights in simple terms, highlight the differences between an SHA and Articles of Association, and provide practical guidance on drafting, reviewing, and executing the agreement.
Why You Need a Shareholders Agreement
Without a shareholders agreement, the relationship between shareholders is governed solely by the Companies Act 2013 and the company's Articles of Association. While these provide a basic framework, they do not address many critical scenarios that arise in real business situations:
- What happens if a co-founder wants to leave the company after 6 months?
- Can a shareholder sell their shares to anyone, including a competitor?
- Who gets to appoint directors and how are board decisions made?
- What if shareholders disagree on a fundamental business decision?
- How is the company valued if a shareholder wants to exit?
- What protections do investors have against their investment being diluted?
- What happens to the company if one of the founders dies or becomes incapacitated?
A shareholders agreement provides clear, pre-agreed answers to all these questions, reducing the risk of disputes and legal battles that can destroy businesses and relationships.
SHA vs Articles of Association: Key Differences
| Parameter | Shareholders Agreement (SHA) | Articles of Association (AoA) |
|---|---|---|
| Legal nature | Private contract between signing parties | Public constitutional document of the company filed with MCA |
| Binding on | Only the parties who sign the SHA | All current and future shareholders, directors, and the company |
| Confidentiality | Confidential document, not publicly available | Public document, anyone can access it on the MCA portal |
| Modification | Requires consent of parties as per the amendment clause | Requires special resolution (75 percent majority) at a general meeting |
| Level of detail | Highly detailed and customised with complex provisions | Generally standardised, based on Table F of the Companies Act |
| Enforcement | Enforced as a contract under the Indian Contract Act through arbitration or courts | Enforced through the Companies Act and NCLT |
| Common content | Anti-dilution, drag-tag, vesting, non-compete, exit mechanisms, detailed governance | Share capital, director appointment, meeting procedures, transfer of shares, dividends |
The SHA should always include a clause stating that in case of conflict between the SHA and AoA, the parties will amend the AoA to align with the SHA. Without this, conflicting provisions can create legal uncertainty. Many companies adopt customised AoA articles that mirror the key SHA provisions.
When Do You Need a Shareholders Agreement
While an SHA is valuable for any multi-shareholder company, it is especially critical in the following situations:
- Co-founder stage: When 2 or more founders start a private limited company together and need to define equity splits, roles, vesting, and exit terms
- Investment rounds: When the company raises funding from angel investors, VCs, or PE funds, investors always require a detailed SHA with protective provisions
- Joint ventures: When two or more companies form a joint venture company and need to define each partner's contributions, roles, and exit mechanisms
- Family businesses: When family members hold shares and need clear rules for succession, share transfers, and conflict resolution
- Partner entry or exit: When a new shareholder joins or an existing shareholder wants to exit, an SHA provides the framework for share transfers and valuation
Key Clauses in a Shareholders Agreement
1. Recitals and Definitions
The recitals section sets out the background and context of the agreement. The definitions section defines all key terms used throughout the SHA. Clear definitions are critical because terms like "fair market value", "material adverse change", "change of control", and "affiliate" can have different interpretations without precise definitions.
2. Share Capital and Shareholding Structure
This clause documents the existing share capital (authorised, issued, and paid-up), the number and class of shares held by each party, and the resulting ownership percentages. If the SHA accompanies a funding round, it details the new shares being issued, the subscription price, the pre-money and post-money valuation, and the post-issue shareholding pattern.
3. Board Composition and Governance
Define the total board size, investor director nomination rights, founder director seats, independent director requirements (if applicable), quorum for board meetings, and the frequency of board meetings. Include a list of reserved matters that require investor or board approval, such as:
- Change in business activity or objects
- Issuance of new shares or convertible instruments
- Incurring debt above a specified threshold
- Related party transactions
- Appointment or removal of CEO, CFO, or CTO
- Annual budget approval
- Acquisition, merger, or sale of material assets
- Changes to the MoA or AoA
- Declaration of dividends
- Winding up the company
4. Share Transfer Restrictions
Share transfer restrictions are the backbone of any SHA. Key provisions include:
- Lock-in period: Founders are typically locked in for 3 to 5 years and cannot sell shares during this period
- Right of first refusal (ROFR): Existing shareholders get the first right to buy shares before they are offered to outsiders
- Right of first offer (ROFO): The selling shareholder must first approach existing shareholders for offers before going to the market
- Board approval: Any share transfer may require prior board or investor approval
- Permitted transfers: Transfers to family members, holding companies, or affiliates are usually permitted without restrictions
5. Anti-Dilution Protection
Anti-dilution clauses protect investors when the company raises future rounds at a lower valuation (down round). The two main types are:
| Type | How It Works | Impact on Founders |
|---|---|---|
| Full ratchet | Investor's price is reduced to the new round price regardless of the amount raised | Highly dilutive; founders bear the full impact of the valuation drop |
| Weighted average (broad-based) | Investor's price is adjusted based on a weighted formula considering old and new prices and shares | Moderate dilution; more balanced between investor protection and founder interests |
As a founder, always try to negotiate for broad-based weighted average anti-dilution rather than full ratchet. Full ratchet anti-dilution can result in severe founder dilution in a down round. Most institutional investors in India accept weighted average anti-dilution as the market standard.
6. Drag-Along and Tag-Along Rights
These are complementary rights that protect both majority and minority shareholders in the event of a company sale:
- Drag-along: Majority shareholders (typically 75 percent or as defined) can "drag" minority shareholders into a sale, forcing them to sell on the same terms. This ensures the buyer can acquire 100 percent of the company.
- Tag-along: Minority shareholders can "tag along" in any sale initiated by majority shareholders, selling their shares on the same terms. This prevents majority shareholders from exiting at a premium while leaving minorities stranded.
7. Non-Compete and Non-Solicitation
The non-compete clause prevents founders and key shareholders from starting or working for a competing business. In India, non-compete restrictions during the term of the agreement are enforceable. Post-termination non-compete clauses must be reasonable in duration (1 to 3 years), geographic scope, and business definition to be enforceable under Section 27 of the Indian Contract Act.
8. Exit Mechanisms
Define how shareholders can exit their investment:
- IPO: List the company on a stock exchange where shareholders can sell in the public market
- Strategic sale: Sell the entire company to a third-party buyer
- Buyback: The company buys back shares from the shareholder (subject to Companies Act limits)
- Put option: The shareholder can force the company or promoters to buy their shares at a predetermined price after a specified period
- Call option: The company or promoters can buy back shares from the shareholder at a predetermined price
Shareholders Agreement for Startups
Startup SHAs have some unique considerations compared to traditional company SHAs:
- Vesting: Founder shares should vest over 3 to 4 years with a 1-year cliff to protect against early departures
- IP assignment: All intellectual property must be assigned to the company, not retained by individual founders
- Full-time commitment: Founders should commit to working full-time exclusively for the company
- ESOP pool: Reserve 10 to 15 percent of equity for an employee stock option pool
- Sweat equity: Define how sweat equity (equity in exchange for non-cash contribution like time and effort) is allocated and valued
- Pivot clause: Allow the company to change its business model with appropriate board/shareholder approval without triggering breach of the SHA
Research consistently shows that co-founder conflicts are among the top reasons startups fail. An SHA with clear equity splits, vesting schedules, role definitions, and exit terms addresses the most common sources of founder disputes before they arise. It is much easier to agree on these terms when everyone is optimistic at the beginning rather than when disagreements have already started.
Shareholders Agreement for Investment Rounds
When a company raises investment, the SHA becomes part of a suite of investment documents that typically includes:
- Term sheet: A non-binding document outlining the key terms of the investment
- Share subscription agreement (SSA): The contract for subscribing to new shares at the agreed price
- Shareholders agreement (SHA): The ongoing governance and shareholder rights document
- Deed of adherence: A document signed by new investors to join the existing SHA
Investor-focused SHA clauses typically include liquidation preference (ensuring investors get their money back before founders in a liquidation event), information rights (monthly/quarterly financials, board meeting minutes), anti-dilution protection, board observer rights, affirmative voting rights on reserved matters, co-sale rights, and drag-tag rights.
Common Mistakes in Shareholders Agreements
- No vesting on founder shares: Without vesting, a co-founder who leaves after 3 months walks away with their full equity stake
- Vague valuation methodology: Without a clear valuation formula, share buybacks and exits become contentious
- Overly broad non-compete: Non-compete clauses that are too broad in time, geography, or scope are unenforceable under Indian law
- No deadlock resolution: Equal shareholders without a deadlock mechanism can paralyse the company
- SHA-AoA conflict: Not aligning the AoA with the SHA creates enforceability issues
- Missing deed of adherence requirement: Not requiring new shareholders to sign a deed of adherence leaves them outside the SHA
- Tax implications ignored: Share transfers, put/call options, and anti-dilution adjustments have tax implications (capital gains, Section 56(2)(x), angel tax) that should be considered during drafting
Cost of Drafting a Shareholders Agreement
| Type of SHA | Typical Cost | Complexity |
|---|---|---|
| Basic founder agreement (2 to 3 co-founders) | 15,000 to 50,000 rupees | Simple equity split, vesting, roles, basic governance |
| Startup SHA with angel or seed investment | 50,000 to 1.5 lakh rupees | Anti-dilution, ROFR, board rights, investor protections |
| Series A or later investment SHA | 1 to 5 lakh rupees | Multiple investor classes, detailed governance, ESOP framework, comprehensive exit clauses |
| Joint venture SHA | 2 to 10 lakh rupees | Complex governance, revenue sharing, IP licensing, territory restrictions, termination clauses |
Executing and Registering the SHA
Once the SHA is finalised and approved by all parties:
- Print the agreement on non-judicial stamp paper of the appropriate value (varies by state, typically 100 to 500 rupees)
- All parties sign on every page with their full signatures
- Two witnesses sign the agreement (with their name, address, and signature)
- Notarisation is recommended (though not legally mandatory) for added legal weight
- Each party retains an original signed copy of the agreement
- Store the SHA securely as a confidential document
- If the SHA requires AoA amendments, file the amended AoA with the MCA using Form MGT-14 within 30 days of passing the special resolution
Conclusion
A shareholders agreement is not just a legal formality. It is the foundation of trust, clarity, and protection for everyone involved in a company. Whether you are a first-time founder, an experienced entrepreneur raising your Series A, or a family business planning succession, investing time and effort in a thorough SHA will save you from far more expensive disputes and misunderstandings down the road.
The key is to address difficult scenarios upfront, when everyone is aligned and optimistic, rather than leaving them to be negotiated during a crisis. Cover the critical areas: equity and vesting, governance and decision-making, share transfer restrictions, anti-dilution and exit mechanisms, and dispute resolution.
If you need professional help with drafting a shareholders agreement, corporate legal services, or contract drafting, our legal team at IncorpX can create a comprehensive agreement tailored to your specific business needs.
Need a professionally drafted shareholders agreement for your company or startup?
Frequently Asked Questions
What is a shareholders agreement?
A shareholders agreement (SHA) is a legally binding contract between the shareholders of a company and often the company itself. It defines the rights, responsibilities, obligations, and protections of each shareholder, and governs how the company is managed, how shares can be transferred, and how key decisions are made. It is a private agreement that supplements the company's Articles of Association (AoA).
Is a shareholders agreement mandatory in India?
No, a shareholders agreement is not legally mandatory under the Companies Act 2013. However, it is strongly recommended for any company with more than one shareholder, especially startups receiving investment, companies with multiple co-founders, joint ventures, and family businesses. Without an SHA, shareholder rights are governed only by the Companies Act and the AoA, which may not address many critical scenarios.
What is the difference between a shareholders agreement and Articles of Association?
The Articles of Association (AoA) is a public document filed with the MCA and governs the company's internal management. The shareholders agreement (SHA) is a private contract between shareholders that provides more detailed and customised protections. The AoA binds all current and future shareholders, while the SHA binds only the signing parties. The SHA typically contains provisions that are too detailed or sensitive for the AoA, such as anti-dilution rights, exit mechanisms, non-compete obligations, and drag-tag rights.
Does the SHA override the AoA?
The Companies Act provisions override both the SHA and AoA. Between the SHA and AoA, the SHA is a private contract and cannot override the AoA in relation to third parties or the company's statutory obligations. However, as a matter of practice, the SHA includes a clause requiring the parties to amend the AoA to align with the SHA terms, and among the signing parties, the SHA typically prevails in case of conflict.
Who should be parties to a shareholders agreement?
The parties to an SHA typically include all shareholders (or at least the significant shareholders), the company itself, and sometimes key management personnel (especially founder-directors). In a startup context, the parties are usually the founders, investors, and the company. In a joint venture, it is the JV partners and the JV company.
When should a shareholders agreement be created?
An SHA should ideally be created at the time of company incorporation when multiple co-founders are involved, or at the time of receiving investment from external investors. It should also be created or updated when new shareholders join, when the company undergoes a restructuring, when there is a significant change in shareholding pattern, or before any merger or acquisition process.
What are the key clauses in a shareholders agreement?
The key clauses in a typical SHA include: share capital structure, board composition and governance, affirmative voting rights (veto rights), share transfer restrictions (ROFR, ROFO, lock-in), anti-dilution protection, drag-along and tag-along rights, non-compete and non-solicitation, confidentiality, IP assignment, dividend policy, information rights, exit mechanisms, dispute resolution, representations and warranties, and termination conditions.
What is the right of first refusal (ROFR)?
The right of first refusal gives existing shareholders the first option to buy shares from a shareholder who wishes to sell. Before selling shares to any third party, the selling shareholder must first offer the shares to the ROFR holders at the same price and terms. If the ROFR holders decline to purchase, only then can the shares be sold to the third party. This prevents unwanted outsiders from becoming shareholders.
What is the right of first offer (ROFO)?
The right of first offer requires a shareholder who wishes to sell shares to first approach the existing shareholders and offer them the opportunity to make a bid. The selling shareholder sets a minimum price, and the ROFO holders can make offers. If the ROFO holders decline or their offers are below the minimum price, the seller can then approach third parties. ROFO gives existing shareholders the first opportunity to bid but does not guarantee matching rights.
What are drag-along rights?
Drag-along rights allow majority shareholders (usually those holding 75 percent or more) to force minority shareholders to sell their shares in the event of a company sale to a third-party buyer. The minority shareholders must sell on the same terms and conditions as the majority. This ensures that a company sale is not blocked by minority shareholders and that the buyer can acquire 100 percent of the company.
What are tag-along rights?
Tag-along rights (also called co-sale rights) protect minority shareholders by allowing them to join in any sale initiated by majority shareholders on the same terms and conditions. If a majority shareholder receives a buyout offer, minority shareholders with tag-along rights can sell their proportionate shares in the same transaction at the same price per share. This prevents majority shareholders from exiting at a premium while leaving minority shareholders behind.
What is anti-dilution protection?
Anti-dilution protection is a clause that protects investors from having their shareholding percentage diluted in subsequent funding rounds at a lower valuation (down rounds). There are two types: full ratchet (the investor's conversion price is adjusted to the new lower price, fully protecting their investment) and weighted average (the conversion price is adjusted based on the weighted average of old and new prices, providing partial protection). Weighted average is more common and founder-friendly.
What is a full ratchet anti-dilution clause?
A full ratchet anti-dilution clause adjusts the investor's share price to the price of the new, lower-priced round regardless of the number of shares issued in the down round. For example, if an investor bought shares at 100 rupees and a down round prices shares at 60 rupees, the investor's shares are repriced to 60 rupees, and they receive additional shares to make up the difference. This is aggressive and can significantly dilute founders.
What is weighted average anti-dilution?
Weighted average anti-dilution is a more moderate form of anti-dilution protection. It adjusts the investor's conversion price based on a formula that considers both the old price and the new price, weighted by the number of shares. There are two variants: broad-based weighted average (considers all outstanding shares including options) and narrow-based (considers only preferred shares). Broad-based weighted average is the most common and is considered founder-friendly.
What is a lock-in period in an SHA?
A lock-in period is a restriction that prevents specific shareholders (usually founders) from selling or transferring their shares for a defined period. Typical lock-in periods for founders range from 3 to 5 years from the date of the SHA or from the date of investment. The lock-in ensures that founders remain committed to the company during the critical growth phase and do not exit prematurely.
What are affirmative voting rights?
Affirmative voting rights (also called veto rights or reserved matters) give specific shareholders (usually investors) the right to approve or block certain critical decisions. Common reserved matters include: changing the company's business, issuing new shares, creating debt above a threshold, related party transactions, changes to MoA/AoA, appointment or removal of CEO/CFO, entering new geographies, acquiring other companies, declaring dividends, and winding up the company.
What is a non-compete clause in a shareholders agreement?
A non-compete clause prevents founder-shareholders from engaging in any business that competes with the company during their involvement and for a specified period after exiting the company. In India, non-compete clauses during the term of the agreement are generally enforceable. Post-exit non-compete clauses must be reasonable in terms of duration (typically 1 to 3 years), geographic scope, and industry definition to be enforceable, as Indian courts apply the Section 27 test of reasonableness under the Indian Contract Act.
What is an IP assignment clause?
An IP (Intellectual Property) assignment clause ensures that all intellectual property created by founders, shareholders, or employees in the course of their work for the company is owned by the company and not by the individual. This includes patents, trademarks, copyrights, trade secrets, software code, designs, and any other IP. This clause is critical for startups and technology companies where the IP is the core value of the business.
What information rights do shareholders have?
Information rights specify what financial and operational information shareholders are entitled to receive from the company. Typical information rights include: monthly or quarterly financial statements, annual audited accounts, annual business plan and budget, board meeting minutes, details of material contracts, compliance reports, and information about any litigation or regulatory actions. Investors usually have broader information rights than ordinary shareholders.
What is a put option in an SHA?
A put option gives a shareholder the right to sell their shares back to the company or to other specified shareholders at a predetermined price or valuation formula after a specified period. Investors often negotiate put options exercisable after 5 to 7 years if no exit event (IPO or strategic sale) has occurred. The put option provides a guaranteed exit mechanism and protects investors from being locked into the investment indefinitely.
What is a call option in an SHA?
A call option gives a shareholder (or the company) the right to buy shares from another shareholder at a predetermined price or valuation formula. Founders may negotiate call options on investor shares to maintain the option of buying back equity. In employee agreements, the company often has a call option on shares held by departing employees. Call options are typically exercisable upon specific trigger events.
How much does it cost to draft a shareholders agreement?
The cost of drafting a shareholders agreement in India varies depending on the complexity and the legal counsel. A basic SHA for a small startup with 2 to 3 founders typically costs 15,000 to 50,000 rupees. An SHA for a company receiving investment, with detailed anti-dilution, exit, and governance clauses, typically costs 50,000 to 2 lakh rupees. Complex SHAs involving multiple investors, foreign parties, or joint ventures can cost 2 to 10 lakh rupees. Professional SHA drafting services can help you get a comprehensive agreement at a reasonable cost.
Is stamp duty payable on a shareholders agreement?
Yes, stamp duty is payable on a shareholders agreement as it is a legal contract executed on stamp paper. The stamp duty rate varies by state. In most states, the duty is between 100 and 500 rupees for an agreement or a percentage of the value involved. In Maharashtra, it is typically 100 rupees if no share transfer is involved. If the SHA involves share issuance or transfer, additional stamp duty may apply on the transfer component.
What is a shotgun clause?
A shotgun clause (also called a buy-sell or Texas shootout clause) is a deadlock-breaking mechanism. If shareholders cannot agree on a critical matter, one shareholder can offer to buy the other's shares at a specified price. The other shareholder must either sell at that price or buy the first shareholder's shares at the same price. This creates a fair market mechanism because the offeror must name a fair price, knowing they might have to sell at that same price.
Can an SHA be amended?
Yes, an SHA can be amended with the consent of the parties specified in the amendment clause (typically requiring consent of shareholders holding a certain percentage, such as 75 percent of the total shares, or consent of all parties to the original SHA). Any amendment must be in writing, signed by all required parties, and executed on stamp paper. It is advisable to have all amendments reviewed by legal counsel.
What happens if a shareholder breaches the SHA?
If a shareholder breaches the SHA, the non-breaching parties can pursue legal remedies under the Indian Contract Act including specific performance (court order to fulfil the contractual obligation), damages (monetary compensation for losses), and injunction (court order to prevent the breaching party from continuing the breach). The SHA's dispute resolution clause determines whether the matter is resolved through arbitration or court proceedings.
What is a vesting schedule in a shareholders agreement?
A vesting schedule determines how and when a founder's shares become fully owned (vested). Typically, founder shares vest over 3 to 4 years with a 1-year cliff. During the cliff period, no shares vest. After the cliff, shares vest monthly or quarterly. If a founder leaves before full vesting, the unvested shares are surrendered back to the company or other shareholders at face value. This protects the company and other shareholders from a co-founder leaving early with a full equity stake.
What is a pre-emptive right?
A pre-emptive right (also called a pro-rata right or subscription right) gives existing shareholders the right to participate in any new share issuance by the company in proportion to their existing shareholding. This prevents dilution without the shareholder's consent. For example, if a shareholder holds 20 percent and the company issues new shares, the shareholder has the right to subscribe to 20 percent of the new shares to maintain their percentage.
Is an SHA enforceable against a new shareholder?
An SHA is enforceable only against the parties who have signed it. It does not automatically bind new shareholders unless they sign a deed of adherence (a document by which the new shareholder agrees to be bound by the existing SHA terms). The SHA should include a clause requiring any new shareholder or transferee to execute a deed of adherence before any share transfer or issuance is completed.
What is the role of representations and warranties in an SHA?
Representations and warranties are statements of fact made by the founders and the company to the investors at the time of signing the SHA. They cover matters such as the company's legal existence, valid shareholding, no pending litigation, no undisclosed liabilities, ownership of IP, compliance with laws, accuracy of financial statements, and validity of material contracts. If any representation turns out to be false, the investor can claim damages or invoke indemnity provisions.
What is an indemnity clause in an SHA?
An indemnity clause requires one party (usually the founders or the company) to compensate the other party (usually the investor) for losses arising from a breach of representations, warranties, or covenants in the SHA. Indemnity clauses typically specify a cap on indemnity liability (often the investment amount), a basket or threshold amount below which claims cannot be made, a time limit for claims (typically 2 to 3 years from signing), and the process for making indemnity claims.
What is a deadlock resolution mechanism?
A deadlock occurs when shareholders with equal voting power or veto rights cannot agree on a critical decision. The SHA should include a deadlock resolution mechanism which may involve: escalation to senior management or independent mediator, a defined cooling-off period, reference to an independent expert or arbitrator, a shotgun or buy-sell clause, or ultimately a winding-up provision. Without a deadlock mechanism, disputes can paralyse the company.
How does an SHA handle founder departure?
The SHA should address founder departure scenarios including: voluntary departure (good leaver), termination for cause (bad leaver), death or disability, and retirement. For bad leavers, unvested shares are forfeited and vested shares may be bought back at face value or a discounted price. For good leavers, unvested shares are forfeited but vested shares may be bought back at fair market value. These provisions protect the company and remaining shareholders from value loss.
Can foreign investors be parties to an SHA?
Yes, foreign investors can be parties to an SHA for an Indian company, subject to FEMA (Foreign Exchange Management Act) regulations and FDI (Foreign Direct Investment) policy. The SHA involving foreign parties must comply with the sectoral caps, pricing guidelines, and RBI reporting requirements. If the company is in a sector with FDI restrictions, the SHA clauses must be consistent with those restrictions. All foreign investments must be reported to the RBI through the AD bank.
What is a founder agreement?
A founder agreement is a type of shareholders agreement specifically designed for company co-founders at the early stage. It covers the roles and responsibilities of each founder, their initial equity split, vesting schedules, intellectual property assignment, full-time commitment requirements, non-compete and non-solicitation obligations, decision-making process, what happens if a founder leaves, and the process for bringing in new co-founders or investors. A founder agreement is simpler than a full SHA but addresses the critical early-stage issues.
Do I need a lawyer to draft a shareholders agreement?
While it is technically possible to draft an SHA without a lawyer, it is strongly recommended to engage a corporate lawyer experienced in shareholders agreements. An SHA involves complex legal concepts including anti-dilution mechanics, drag-tag rights, vesting formulas, FEMA compliance (for foreign investors), and tax implications. A poorly drafted SHA can create ambiguities, unenforceable clauses, or unintended consequences that may cost significantly more to resolve later.
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