Case Behind the Clause

What Happens When a Co-Founder Leaves Without a Vesting Schedule

Published 14 September 2026 · 7 min read · Researched by Rakesh Jaiswar, LLB student, Mumbai

Your co-founder leaves after 6 months. Under most informal Indian startup agreements, they keep 100% of their equity — permanently. Here's why this happens, what it costs you, and the clause that prevents it.

Of all the legal gaps in Indian startup agreements, this is the one that surprises founders most — because it feels obviously unfair, and yet Indian law gives you almost no recourse without a written vesting schedule. The courts won't fix it for you. Investors won't overlook it. And by the time the problem surfaces, it's usually too late to resolve cheaply.

What actually happens without a vesting schedule

When two founders start a company and agree informally on equity — say, 60/40 — that split is typically reflected in the company's shareholding from day one. Both founders are issued their full shares at incorporation. Without a vesting schedule, those shares are owned outright, immediately, with no conditions attached.

If the co-founder who holds 40% then leaves after 6 months, they leave with 40% of your company. There is no automatic mechanism to claw back those shares. The company doesn't get them back. The remaining founder doesn't get them back. They sit with someone who is no longer building the business — a "dead equity" problem that haunts you every time you try to raise money, bring in new co-founders, or make major decisions.

Real scenario — The funding round problem

A two-founder startup raises a seed round 18 months after incorporation. One founder left at month 4, amicably, to take a job. They still hold 35% of the company. The investor looks at the cap table, sees a 35% stakeholder who is not involved in the business, and asks two questions: (1) Can that person block major decisions? (2) Will they participate in future rounds or cause dilution problems? The round is restructured. The remaining founder has to negotiate a discounted buyback from someone who now knows they have significant leverage. What should have been a ₹5L conversation at month 4 becomes a ₹25L problem at month 18.

Real scenario — The hostile departure

Co-founders fall out at month 8. One leaves but retains 40% of the company. They refuse to sign documents needed for a corporate action, demand board representation, and use their shareholding as leverage in a personal dispute. Without a vesting schedule and a buyback mechanism, the remaining founder has no clean exit path — litigation is the only option, and litigation takes years.

Why Indian law doesn't automatically fix this

Some founders assume a court would look at a situation where a co-founder left early and held onto full equity, and intervene to correct it as "unfair." Indian courts generally won't — equity ownership is a property right, and courts are reluctant to interfere with contractual arrangements (or the absence of them) between sophisticated parties who should have documented their arrangement properly.

The Legal Position — Companies Act 2013 + Indian Contract Act 1872 Once shares are issued and allotted, they belong to the shareholder. The Companies Act 2013 provides mechanisms for buybacks and share transfers, but these require the shareholder's consent unless the Articles of Association or a shareholders' agreement specifically provides otherwise. Without a written vesting schedule and buyback mechanism, there is no unilateral right to recover shares from a departing co-founder.

The V.B. Rangaraj Problem The Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan (AIR 1992 SC 453) held that transfer restrictions in a shareholders' agreement only bind the company if they are also reflected in the Articles of Association. This means a vesting schedule and buyback mechanism in your co-founders agreement must be mirrored in your AoA to be fully enforceable against the company — not just between the founders personally. This is a detail most generic templates miss entirely.

How a vesting schedule actually works

A vesting schedule doesn't change who is issued the shares — both founders still receive their full allotment at incorporation. What it changes is the legal status of those shares: unvested shares are subject to a buyback right (exercisable by the company or the remaining founders) at a pre-agreed price, usually face value or cost. As time passes, shares vest — meaning the buyback right expires over that portion.

Standard 4-year vest, 1-year cliff — how it works

Month 0-12

0% vested (cliff period)

Month 12

25% vests at once

Month 13-48

Remaining 75% vests monthly (2.08%/month)

Month 48

100% vested — buyback right fully expired

If a founder leaves before month 12, 100% of their shares are subject to buyback. If they leave at month 24, 50% are vested (theirs to keep), 50% are subject to buyback.

Good Leaver vs Bad Leaver — a distinction that matters

A properly drafted vesting schedule distinguishes between two departure scenarios, because the consequences should be different:

Departure type	Definition	Buyback price
Good Leaver	Leaves due to death, permanent incapacity, or with mutual consent — not due to breach or performance failure	Fair Market Value — the departing founder gets paid what their unvested shares are actually worth
Bad Leaver	Leaves in breach of the agreement, is removed for cause, or competes with the business	Face value or cost price — typically a nominal amount, reflecting that the departure was at fault

One thing to get right on Bad Leaver classification The decision to classify a departure as "Bad Leaver" should never be a unilateral majority vote by the remaining founders — this creates an obvious conflict of interest and risks being challenged. A properly drafted agreement routes any disputed classification to the dispute resolution mechanism, with a self-help transfer suspension right if the remaining founders don't pay within a defined window.

What a vesting schedule needs to include

Total vesting period (4 years is standard; 3 years is acceptable for very early-stage)
Cliff period (12 months is standard — no vesting at all before the cliff)
Vesting schedule after cliff (monthly is standard, quarterly is acceptable)
Good Leaver and Bad Leaver definitions — specific, not vague
Buyback price for each category — Face Value for Bad Leaver, FMV for Good Leaver
Who holds the buyback right — the company, the remaining founders, or both (in which order)
Payment timeline for the buyback — and what happens if the buyer doesn't pay in time
AoA alignment — the transfer restrictions must be mirrored in your Articles of Association
Acceleration provisions — what happens to unvested shares if the company is acquired

What about founders who joined at different times?

If co-founders join at different stages — one at day one, one six months later — their vesting schedules should reflect their actual start dates, not the company's incorporation date. A founder who joins six months in shouldn't have their clock start from month one — but they also shouldn't get credit for months they weren't there. This sounds obvious, but it's regularly missed in generic templates that apply a single vesting start date to all founders regardless of when they actually joined.

Can you add a vesting schedule retrospectively?

Yes — but it requires all founders to agree and sign, and it requires amending your Articles of Association and potentially filing with the ROC. It's significantly more complicated than doing it at the start, and a departing co-founder who knows you need their signature has considerable leverage. The practical answer: do it at incorporation, not when someone is already heading for the door.

Don't leave this to a handshake

Our Co-Founders Agreement (LLP) includes a complete vesting schedule with Good Leaver / Bad Leaver mechanics, AoA alignment language, and the buyback mechanism — verified against the Companies Act 2013 and the V.B. Rangaraj requirement.

View Co-Founders Agreement →

Sources: Companies Act, 2013; Indian Contract Act, 1872; V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453 (SC). This article is general legal education, not advice on your specific situation. Consult an enrolled advocate for specific legal questions about your agreements.

Researched and verified by Rakesh Jaiswar, LLB student, Mumbai — September 2026.