पाठशाला Pathshala · धन Dhan, Money · Lesson 14 · Build

The shareholders’ agreement: what you are actually signing

The term sheet sets the price. The shareholders’ agreement decides who may sell, who may force a sale, what you may not do without consent and what happens to your shares if you leave.

Pathshala, The Founder Library · 11 October 2026 · 8 min read

Antique metal keys hang in a row against a dark wall. — Photograph: Ron Lach · Pexels

A term sheet is three pages that a founder reads ten times. The shareholders’ agreement that follows is forty pages that most founders read once, at midnight, the day before closing. It is the document that will govern the company for the next seven years.

This lesson reads it in the order the clauses tend to matter: what the agreement is and where it must live, founder lock-in and leaver terms, transfers and the drag-along (with a figure to test your own numbers), reserved matters, exits, and the handful of clauses that are harmless on the day of signing and decisive in a bad year. It assumes you have read [the term sheet lesson](/library/term-sheet-clause-by-clause), because every clause here was first agreed there in a sentence.

Two agreements and the articles

An Indian venture round closes on two contracts. The share subscription agreement covers the money: who pays what for which shares, the conditions to closing, and the warranties the company and often the founders give about the state of the business. The shareholders’ agreement covers the relationship afterwards: the board, information, consents, transfers, exits and what happens when someone leaves. When a later round closes, the shareholders’ agreement is usually restated and every existing shareholder signs again.

Then there is the third document, the one founders forget. In V.B. Rangaraj (1992) the Supreme Court held that a restriction on transferring shares that is not in the articles of association binds neither the company nor its shareholders; a 2012 decision in the Vodafone case took a different view without overruling it, and the law is unsettled. The practice that follows is simple: every right in the agreement is copied into the articles, and where the two conflict the articles win. Read the amended articles line by line against the agreement. A right that exists only in the agreement may not protect you, and a restriction that exists only in the articles will bind you whether you remember agreeing to it or not.

Founder lock-in and the leaver clauses

Investors in an Indian round buy a team as much as a business, so the agreement ties the founders to the company in three ways. Lock-in stops founders transferring their shares, usually until an exit or for a period of years, with small exceptions for family trusts and estate planning. Founder vesting, often written as reverse vesting because the founders already own their shares, lets the company buy back unvested shares at a nominal price if a founder leaves early; [the vesting lesson](/library/vesting-and-the-cofounder-cliff) has the schedule. Leaver terms decide the price for vested shares: a good leaver, who leaves through death, disability or by agreement, keeps them or sells at fair value; a bad leaver, who leaves for cause or to join a competitor, may be forced to sell at cost or at face value.

The definitions decide everything. Read what counts as cause. A definition that includes ‘material breach of the agreement’ or ‘failure to meet the business plan’ turns a missed quarter into a bad-leaver event. Ask for cause to be limited to fraud, wilful misconduct and serious criminal offences, decided by a process rather than by notice. Ask that a founder removed by the board without cause is a good leaver by definition. And ask for acceleration of vesting if the company is sold and the founder is not offered a comparable role, because otherwise a buyer acquires a founder’s unvested shares for nothing by removing the founder on day one.

Transfers: ROFR, tag-along and drag-along

Four transfer clauses appear in almost every agreement. A right of first refusal lets existing holders buy shares that another holder wants to sell, at the price a third party offered. A right of first offer makes the seller offer them to existing holders first, before any third party is approached; it is kinder to the seller because it does not chill outside buyers. Tag-along lets minority holders sell alongside a majority holder on the same terms, so that a founder cannot sell control and leave the investors behind. Drag-along lets holders of a stated share compel everyone to sell to a buyer on the same terms, so that a small holder cannot hold an exit hostage.

A yellow tugboat tows a loaded coal barge across a calm blue sea. — A drag-along lets the holders of enough shares tow everyone else into a sale. Read the threshold and the floor before you agree to be the barge. Photograph: Arda Kaykısız · Pexels

The drag is the transfer clause that bites. Three numbers decide it: the threshold (the share of all shares that must vote for the sale), the consents it needs on top (often a majority of the investors, sometimes the founders), and the floor (the minimum price, often written as a multiple of what the last investor paid). A drag that investors can trigger alone, with no floor, lets them sell the company over the founders’ objection at a price that returns their preference and little else. The Holloway guide to venture capital puts the opposite risk in one line: a badly negotiated consent can let investors holding as little as one per cent of the company block its sale.

Three things to read off it. With founders at fifty-five per cent and a sixty per cent threshold, nobody can drag alone; the threshold is the founders’ protection only for as long as their stake stays near it, and two more rounds will take it below. A consent requirement of a majority of the investor class gives the lead investor a veto whatever its stake, which is reasonable early and corrosive late; ask that it fall away after a date or above a price. And the floor is the clause founders forget to ask for: a drag that cannot be triggered below twice the last round price turns a fire sale into a negotiation.

Reserved matters: the clause that runs the company

Reserved matters, sometimes called affirmative votes, are the decisions the company may not take without the consent of named investors. The term sheet listed them in a sentence; the agreement lists them in a schedule that can run to forty items. A sensible schedule protects the investment: new classes of shares, changes to the articles, a sale or merger, winding up, borrowing above a limit, related-party transactions, a change in the business. A schedule that reaches the annual budget, every hire above a salary and every contract above a small sum moves the management of the company into the investor’s inbox.

Two drafting points matter more than the list itself. First, the consent mechanism: whether the consent is given by a named investor, by a majority of the investor class or by an investor director at the board, and how long the investor has to answer. A clause that deems consent given after ten working days of silence is worth more than any deletion. Second, the fall-away: rights that suit a seed investor holding fifteen per cent are wrong for one holding three per cent after dilution. Ask that each investor’s rights lapse when its holding falls below a stated share.

Exits, put options and what the foreign-exchange rules forbid

Indian agreements usually require the company and the founders to give investors an exit by a date, through a public offer, a strategic sale or a buy-back, and they say what happens if it does not: the investor may drag, may require a buy-back, or may require the founders to buy its shares. For a non-resident investor the Reserve Bank’s Master Direction on foreign investment permits optionality clauses only after a minimum lock-in of one year and without any right to exit at an assured price; the investor leaves at the price prevailing at the time, within the pricing rules. A clause that promises a foreign investor its money back with a return is outside those rules.

For any investor, resident or not, the clause to refuse is a personal one. An obligation on the founders, as individuals, to buy an investor’s shares turns an equity investment into a personal loan with no interest rate written down. The company may promise to use its best efforts to provide an exit; the founders should promise nothing that requires their own money.

The clauses that bite later

Warranties and indemnities. In most Indian rounds the founders give warranties about the company alongside the company itself, and agree to indemnify the investor if a warranty proves untrue. Ask for founder liability to be capped, ideally at a modest multiple of the founder’s annual salary or a share of what the founder receives in a sale, limited in time, and excluded for anything disclosed in the disclosure letter. Then disclose everything; a disclosed problem is a known risk, an undisclosed one is a claim.

A fountain pen nib in close-up in black and white. — Warranties and indemnities are signed in the same ink as everything else. They are read only when something has gone wrong. Photograph: Prashant pacific · Pexels

Non-compete and non-solicit. Investors ask founders not to compete during their employment and for a period afterwards. Under section 27 of the Indian Contract Act an agreement restraining anyone from a lawful profession, trade or business is void to that extent, with an exception for a seller of goodwill; a founder who sells shares at an exit may therefore be bound in ways an employee is not. Agree a scope you would accept if it were enforced in full.

Deadlock and information. If the board or the shareholders are deadlocked on a reserved matter, the agreement may route it to escalation, mediation or a buy-sell mechanism in which one side must buy or sell at a stated price. Buy-sell clauses favour whoever has the cash, which is rarely the founder. Information and inspection rights are normal; agree a cadence your finance function can meet and a confidentiality clause that binds the investor’s other portfolio companies too.

The term sheet is what founders negotiate. The shareholders’ agreement is what the company lives under, and its worst clauses are the ones that only matter in a bad year.

Before you sign: the clause-by-clause read

Take a full working day, not an evening, and do it with the agreement, the amended articles and the term sheet open side by side. Mark every clause that departs from the term sheet. Run your cap table through the drag figure above twice: once as it is today and once after two more rounds at fifteen per cent dilution each, and note when the founders lose their block. Read the definition of cause aloud. List every reserved matter and mark each one protect or run, then ask for the run items to go and for a deemed-consent period on the rest. Check the founder warranty cap and the non-compete scope. Confirm every transfer restriction and every investor right appears in the articles in the same words.

Then put two dates in the calendar: the day each investor’s rights should fall away under the thresholds you agreed, and the date of any exit obligation. Review the agreement once a year at the annual general meeting, and again before every new round, because each restated agreement is the cheapest moment to remove a clause that has outlived its purpose.

Nothing here is legal, tax or investment advice. The foreign-exchange provisions and the Contract Act text were checked on 11 October 2026; have the agreements and the articles reviewed by a lawyer who has closed Indian venture rounds.