Can a co-founder be removed if there is no shareholder agreement?

Removal as a director follows Section 169 of the Companies Act 2013, which allows shareholders to remove a director by ordinary resolution after special notice. Removal as a director does not extinguish the co-founder's shareholding. Without an SHA or AOA-backed share repurchase right, the removed founder keeps their shares and the resulting cap table tension remains.

What is the tax on a co-founder buyback in India in 2026?

For buybacks on or after 01 April 2026, proceeds are taxed as capital gains in the shareholder's hands under Section 69 of the Income-tax Act, 2025 (Section 46A of the 1961 Act). Co-founders typically meet the promoter test under Section 2(69) of the Companies Act or the over 10% shareholding threshold in Section 69 of the ITA 2025, and pay an additional tax that takes the effective rate to roughly 30% for individuals and 22% for corporate promoters.

How does FEMA apply when a non-resident co-founder exits?

The transfer is governed by the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Pricing must follow the exit pricing guideline, meaning consideration must not exceed FMV under an internationally accepted methodology. Reporting is required via Form FC-TRS within 60 days of receipt of consideration. The Authorised Dealer bank handles the filing, but the parties remain liable for accuracy.

Can a co-founder agreement override the AOA?

No. The AOA is the constitutional document of the company and prevails. Any provision in the co-founder agreement that is not mirrored in the AOA may not be enforceable against the company or other shareholders.

What is reverse vesting and how does it work for Indian startups?

Reverse vesting is the standard Indian founder equity construct where founders are issued the full equity upfront, but the AOA gives the company a right to repurchase a defined portion at par value or a nominal price if the founder leaves before the vesting period ends. Four years with a one-year cliff is the market standard. The repurchase right must be in the AOA, not just the SHA, to be enforceable against the founder's shares.

What are the three exit routes when a co-founder leaves an Indian startup?

There are three main routes: first, a secondary sale where the exiting co-founder sells their shares to an incoming investor or third party, with no dilution to other shareholders; second, a buyback by the company under Section 68 of the Companies Act 2013, subject to a 25% cap on paid-up capital plus free reserves in a financial year; and third, a direct share transfer to remaining co-founders, which is limited in practice by the personal liquidity required to buy out a stake at fair market value.

What is the tax treatment on a secondary sale by an exiting co-founder?

The exiting co-founder pays capital gains under Section 67 of the Income-tax Act, 2025 (Section 45 of the Income-tax Act, 1961). For unlisted shares, the holding period for long-term classification is 24 months. Long-term capital gains are taxed at 12.5% under Section 197 of the ITA 2025 without indexation. Short-term gains are taxed at the applicable slab rate. If shares are transferred below fair market value under Rule 11UA, Section 73 of the ITA 2025 deems the consideration to be FMV in the seller's hands, and Section 92 taxes the shortfall as income from other sources in the buyer's hands.

Why should founders set up the SHA and AOA at seed stage rather than Series A?

Retrofitting founder vesting, leaver provisions, and share repurchase rights at Series A means negotiating under investor pressure, on terms not controlled by the founders. Doing it at seed stage costs a fraction of the effort and leaves founders in control of the drafting. Investors at Series A will demand that these mechanics are already in the Articles, and founders who arrive without them end up redrafting from scratch on less favourable terms.

What is the difference between a good leaver and a bad leaver in founder vesting?

A good leaver typically receives their vested shares plus a defined consideration on exit. A bad leaver, such as a founder who resigns without cause or breaches obligations, generally receives only paid-up value or par value for unvested shares. These mechanics must be written into the AOA to be enforceable as a corporate action. Without them in the AOA, the vesting framework exists only as a contractual promise with no automatic enforcement mechanism.

When should founders carve out the ESOP pool?

The ESOP pool of 10 to 15% should be created and approved before the first external funding round. Carving it out post Series A means founders bear the dilution alone rather than sharing it with the incoming investor, because term sheets typically require the pool top-up to come pre-money. Doing it early avoids a structurally disadvantageous negotiation at the time of fundraising.

CALL US +91-99301 56000 support@treelife.in

BOOK A CONSULT

Home > Legal > Co-founder equity structure in India: Why a co-founders’ agreement may not be enough

Co-founder equity structure in India: Why a co-founders’ agreement may not be enough

Written By

Priya Kapasi Shah

Published on

April 28,
2026

Last updated on

April 28, 2026
17:00

Link copied to clipboard!

https://dev.treelife.in/legal/co-founder-equity-structure-in-india/

Startup

Investor

Going Global

Startup

Investor

Going Global

Co-founder equity structure in India: Why a co-founders’ agreement may not be enough

Written By

Published on

April 28,
2026

Last updated on

April 28, 2026
17:00

Share

Not sure which exit route works for your co-founder situation?

Let's Talk

Startup

Investor

Going Global

Startup

Investor

Going Global

Co-founder equity structure in India: Why a co-founders’ agreement may not be enough

Written By

Published on

April 28,2026

Last updated on

April 28, 202617:00

Share

Not sure which exit route works for your co-founder situation?

Let's Talk

April 28,
2026

April 28, 2026
17:00