October 23, 2026 | Corporate & CommercialSecuring investment is a significant milestone, but the real test lies in balancing investor expectations with the founders’ vision and the company’s long-term growth. A well-structured legal framework helps protect stakeholder interests, support business decisions and prevent contractual obligations from becoming obstacles as the startup evolves.
When a startup closes an investment round, founders can continue to grow their business with the necessary funds, while investors start to work towards protecting and maximizing their return on investment, influencing major company decisions, and more.
From a legal perspective, the closing of an investment transaction marks the start of the investors’ post-investment relationship with the startup, when the post-closing rights and obligations of the parties contained in the transaction documents start to become a living part of the startup’s everyday life.
Provisions in the Shareholders’ Agreement (SHA), Share Subscription Agreement (SSA), Articles of Association (AoA) and other documents can grant investors significant influence over a company’s management and restrict the actions of the founders of the company. Investors and founders will also be defined in the documentation and will have specific rights and obligations with respect to exit events and liquidation of a company. Examples of such provisions include: (i) the composition of the Board of Directors of a company; (ii) the requirement for certain actions to be approved by the investors or founders; (iii) certain changes in control; (iv) transfer restrictions on shares; and (v) contractual rights to require the company or its shareholders to facilitate an exit.
These provisions may remain largely untested during the early stages of a company’s growth. Their significance becomes apparent when the company needs additional capital, proposes a transaction that requires investor approval, experiences a disagreement among shareholders, or receives an acquisition offer.
Thus, while negotiating the terms of an investment, it is important to consider not only what rights are desirable but also how they can be realised in practice given the current and future organisational, managerial and financial capabilities of the company.
At or following the closing of an investment, a number of matters will need to be completed, including the payment of the subscription money, the allotment of securities, updating the company’s statutory registers and completing the required filings with the Registrar of Companies, within the applicable statutory timelines. If the investor is overseas (i.e. resident outside India), then additional requirements of FEMA (e.g. in relation to the entry route, sectoral caps, pricing, reporting, etc.) and other applicable laws will also need to be complied with.
A close examination of the executed documents, corporate approvals, statutory filings and other obligations will highlight any gaps that could hinder future fundraising or transactions.
Even when founders retain a large percentage of equity, their ability to act as they wish will often be restricted by the control rights of an investor.
These governance rights are set out in the investment documents. Typically, the investor(s) will have representation on the Board of the company and their consent will be required for certain key transactions. Reserved matters can include issues such as the issuance of further securities, any changes to the company’s capital structure, material borrowings by the company, acquisitions by the company, related party transactions, any changes to the nature of the company’s business and any amendments to the company’s constitutional documents.
Consent by an investor will not override any legal requirements for approval by the Board or by shareholders. Investor-nominated directors will also have a statutory duty to act in the best interests of the company.
It is essential to the investor’s interest to have such participation rights in place. However, the wording of the terms and conditions has to be precise so as not to give the investor excessive control over routine operational matters.
A broad formulation of reserved matters could in some cases be detrimental to a company’s operations as it could require the investor’s consent for day-to-day operational matters of the company.
The agreement should specifically state which expenses, procurements or personnel decisions require the consent of the investor, what spending thresholds apply, and how approval should be obtained if time is limited. Similar care is required when drafting provisions governing board composition, quorum and decision-making.
For the investor, a carefully crafted governance framework is key to protecting their investment. For the company, such a framework is equally important to ensure that investor rights do not unnecessarily restrict its ability to operate.
Founder arrangements are one of the often ignored parts of a venture capital investment transaction. Issues that surface in founder arrangements, however, typically surface much later in the development of the company in question. These founder arrangements are intended to protect the investor and the company by preventing the early departure of founders or by regulating the transfer of their shares to third parties.
To the extent that the investor in a venture transaction wants the people who know the business best and who have contributed to the development of the company to continue working for the company in the long term, tools like vesting, restrictions on transfer, minimum service requirements, and leaver provisions can be used. Again, these have to be applied carefully and the limits of the use of each of these tools have to be clear.
The relevant provisions and their scope of application need to be defined in detail. A founder’s shareholding can be subject to a vesting arrangement. Existing shares held by a founder may be subject to the same restrictions as newly issued shares under a contractual transfer restriction or a purchase option. A lock-in clause restricts a founder’s ability to transfer shares for a certain period of time. Leaver provisions outline the obligation of a founder to offer his shares to the company or third parties and the respective price.
Already-issued shares will not automatically be returned to the company and any attempt by the company to acquire its own shares will have to be by means of a properly conducted buy-back or capital reduction.
The differences between a good and a bad leaver are important to understand, as are the circumstances in which the company, an investor or another specified person is entitled to purchase the founder’s shares. While the exact wording may vary from transaction to transaction, it must be clear to all parties what event constitutes a leaver and how the purchase price is determined. Otherwise, a dispute may arise as to whether a particular circumstance qualifies as a good or bad leaver.
A similar issue arises when calculating the purchase price. A requirement that it be calculated using the fair market value of the founder’s shares produces a different result from a formula that stipulates the initial cost or some other value. It is important to clearly define how the shares’ value is calculated, what events affect this value, which shares are covered—vested, unvested or both—and what actions should be taken if the parties disagree with the result.
When calculating the purchase price, it is necessary to consider not only the founder arrangements but also applicable company law, tax law and, where a resident–non-resident transaction is involved, FEMA pricing requirements. A contractual formula cannot override mandatory legal requirements.
When negotiating founder arrangements, it is also important to pay attention to restrictions on the transfer of shares and the possibility of early termination of obligations. Founders should be aware of how much flexibility they have in choosing whether to move on, what consequences may follow if they leave the company, and what risks they run in either case.
ESOPs serve to attract and motivate employees by giving them the opportunity to acquire company shares. At the same time, an ESOP pool affects the company’s fully diluted capitalisation, and the issue of shares upon exercise of options can dilute existing shareholders.
One of the key issues when designing an ESOP is the size of the option pool. It is important to understand how this pool will be accounted for in the capitalisation and what impact it will have on existing shareholders. In particular, investors often require a sufficiently large option pool to attract the necessary talent to the company. At the same time, whether the pool is accounted for on a pre-money or post-money basis can have a significant impact on the ownership percentages of existing shareholders.
For an Indian private company, ESOPs must be designed in accordance with Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, among other applicable requirements, with the appropriate approvals, filings and documentation.
The design of the plan must take into account the eligibility of employees and directors under the applicable rules. Grants to persons resident outside India may also require compliance with FEMA. In addition, it is important to distinguish between the grant and vesting of options, their exercise, and the allotment of shares. Employees do not acquire shareholder rights merely because options have been granted or vested.
Anti-dilution and dilution are matters of great concern to investors. In many shareholder agreements and investor rights agreements, anti-dilution provisions are included to protect the interests of investors. In such provisions, price-based anti-dilution is the most common form of relief in respect of the issue of further shares at a lower price per share than that paid by such investor.
Under the weighted average method, the adjustment generally takes into account both the lower issue price and the number of new shares issued, using the agreed capitalisation base. Under the full ratchet method, the investor’s conversion or adjustment price is generally reset to the lower issue price, irrespective of the number of shares issued. Full ratchet protection is usually more dilutive for the other shareholders.
In addition to specifying the formula, the parties should also consider the scope and limitations of anti-dilution protection. For example, the agreement may exclude specified issuances under an employee stock option plan or other agreed issuances. Stock splits and similar capital reorganisations should also be addressed separately so that the adjustment mechanism operates as intended.
Pre-emption or pro-rata participation rights allow eligible shareholders to subscribe to a new issue to maintain their ownership percentage. These rights are distinct from price-based anti-dilution protection and must be considered separately under the investment documents and applicable law.
When protecting against dilution, particular attention should also be paid to the legal and organisational requirements for the issuance of shares and valuation under applicable law. Any adjustment must comply with applicable issuance, transfer, valuation and pricing requirements, including FEMA requirements where relevant.
When considering anti-dilution rights, founders should understand how they may affect their ownership and the economic value of their holding in subsequent financing rounds. Investors, on the other hand, must consider how the protection will operate without making future fundraising commercially impractical.
The terms of an investment transaction are rarely the final word, as the capitalisation of the company may change significantly during its development. As a result, when raising additional rounds of financing, the parties must consider not only the terms of the new investment but also the consequences for existing shareholders. New investors often seek additional governance rights and protection against dilution.
This may lead to tensions between new and existing investors, as their rights may overlap or conflict. Under the existing transaction documents, shareholders may retain pre-emption rights, rights of first refusal, information rights, board representation, approval rights for certain transactions, or special rights in the event of changes in control. Thus, when raising additional financing, the company should review these terms and the consequences of their application.
The existing investment documents may require the consent of specified investors or shareholder groups for a new investment, in addition to the corporate approvals required by law. In practice, a separate investor approval procedure may therefore be required. This can complicate the fundraising process, as different parties may have different requirements for such consents.
When designing the terms of a new round of financing, special attention should be paid to the rights of shareholders who have opted out of the subscription. In addition, the agreement should explicitly govern the rights and obligations of holders of different classes of shares. Particular attention should be paid to the fully diluted capitalisation of the company.
Finally, when reviewing the terms of financing, it is important to consider not only the latest shareholders’ agreement but also the other documents affecting shareholder rights, including the AoA, subscription agreements, convertible instrument documents, ESOP documents and any other relevant agreements. An analysis of these documents together will provide a complete picture of the rights and obligations of the parties.
Disputes between founders, directors and investors may arise when the prospects of the company appear to be declining. The reasons may relate to the need to sell the company, new rounds of financing, changes in the composition of the board, the use of the company’s assets, or other issues. Rights under the SHA, SSA, AoA or other documents may be interpreted differently by the parties, leading to disagreements.
Disputes between shareholders may even be considered under Sections 241 and 242 of the Companies Act, 2013 regarding possible cases of oppression and/or mismanagement. Again, whether these sections even apply will depend on the facts of the matter and the statutory requirements. Not all disputes between shareholders will be covered. Applicants must satisfy the eligibility requirements under Section 244 or obtain a waiver of the applicable requirements from the NCLT.
Disputes must also be considered in light of the dispute resolution procedures contained in the agreements. Purely contractual disputes may be resolved through arbitration where a valid arbitration agreement applies and the dispute is arbitrable. Genuine oppression and mismanagement claims seeking statutory relief under Sections 241 and 242 fall within the jurisdiction of the NCLT and are not displaced merely by an arbitration clause.
The prevention and resolution of disputes depend on both the applicable law and the agreements to which the parties are subject. By establishing effective decision-making rules, documenting board decisions and designing appropriate exit mechanisms, the parties can reduce the risks of disagreement.
An exit is one of the most important stages in the life of the company, which is why many shareholders’ agreements contain provisions governing the transfer of control or ownership. These terms may provide for a sale of the company, specify liquidation preferences, or give shareholders contractual rights to seek a sale, buy-back or redemption, subject to applicable law.
Drag-along rights allow the shareholders specified in the agreement to require other shareholders to participate in a qualifying sale, subject to the agreed thresholds and conditions. A right of first refusal (ROFR) gives its holder the opportunity to purchase shares proposed to be sold to a third party on the notified terms before that sale is completed. Tag-along rights allow eligible shareholders to participate in a qualifying sale by another shareholder, on the terms specified in the agreement.
These and other rights can affect the exit strategy and the division of proceeds from a sale. The agreement must clearly state the requirements and restrictions that apply to an exit, as well as the parties’ obligations.
Contractual liquidation preferences do not override the statutory priority of creditors in an actual liquidation. Any company buy-back or redemption must comply with applicable company law, and exit arrangements involving non-residents must comply with applicable FEMA requirements, including restrictions on assured returns.
In addition, it is important to distinguish between the rights of different shareholders and clarify how those rights interact with the AoA and applicable legal requirements.
Our Corporate team advises founders, startups, investors and established businesses on:
Corporate structuring, incorporation and constitutional documents.
Investment documentation, fundraising and closing requirements.
Corporate governance, reserved matters and investor rights.
Founder arrangements, vesting, transfer restrictions and ESOPs.
Subsequent financing, dilution and reconciliation of investor rights.
Shareholder disputes and appropriate remedies.
Secondary sales, mergers and acquisitions, due diligence and exits.
Our approach focuses on identifying legal and contractual issues before they become transaction obstacles, while aligning the company’s documents with its commercial objectives.
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