Part 2 - Keeping everyone aligned: Lock-ins, Transfers & Founder Restrictions at FoodSwift

This second part of our SHA series explains key rules for share transfers and founder commitments. You will learn how to set up simple, effective terms that keep your team stable after raising seed funding. I will also show you how to avoid common pitfalls that can lead to misalignment or founder exits.

Introduction: From control structure to protective boundaries

“Congratulations on securing your board composition and decision-making framework,” I told Rahul and Priya as we wrapped up the first drafting session for FoodSwift’s shareholders’ agreement.

Priya leaned back in her chair with a satisfied smile. “So we are done now, right? Two founder directors, one investor director, and a clear list of what needs special approval?“

I shook my head. “We have only established who makes decisions. Now we need to address what happens when someone wants to leave or sell their shares, among other things.“

Rahul’s eyebrows shot up. “Leave? We are not planning to go anywhere.“

“Neither is your investor,” I replied. “But shareholders’ agreements are not about plans, they are about possibilities. What if a founder gets a lucrative job offer next year? What if your investor wants to sell their stake to a competitor? Without the right framework, these scenarios can destroy everything you have built.“

This is where the second layer of the SHA provisions comes into play.

If the control and decision-making clauses I covered in Part 1 are the foundation of your governance house, then the alignment and restriction provisions I will cover now are the locks on the doors and windows. They ensure that everyone stays committed, information remains protected, and no one suddenly exits in ways that may harm the company.

After establishing who controls what, I have to now shift my focus to creating boundaries that:

keep founders committed through lock-in periods
regulate how shares can be transferred
protect confidential information and intellectual property
ensure everyone receives the information they need

Just so you know, these provisions are not about mistrust but about creating predictability in a world where circumstances change with time.

As I explained to FoodSwift’s founders, “The best time to agree on these rules is now, when everyone is excited and aligned, not later when tensions might be running high.“

With this backdrop, in this article, I will walk you through the key alignment and restriction clauses or as I call them, protective clauses, that I implemented for FoodSwift’s SHA.

You will get to know how to draft

information rights that keep investors informed without overwhelming founders,
transfer restrictions that prevent harmful share sales, and
founder commitments that balance retention with reasonable flexibility.

In terms of SHA, I will be covering the following clauses:

Let us start with the information flow—the essential visibility that keeps investors confident and founders accountable.

Information & inspection rights

“Why do they need to see our bank statements every month?” Rahul asked, frowning at the investor’s initial draft of information rights. “That seems excessive.“

He had a point.

While transparency is vital in investor relationships, excessive reporting can strangle an early-stage startup. It was important for me to find the right balance for FoodSwift’s operating efficiency and investor confidence.

Information rights might not sound as exciting as control rights, but in my experience, investors use them all the time. Even before any boardroom conflict begins, they expect regular updates and reports as promised.

The purpose of information rights

At its core, information rights serve three essential functions:

Monitoring investment: Investors need visibility into company performance to track their investment.
Early problem detection: Regular reporting helps spot issues before they become crises.
Strategic input: The right information empowers investors to provide valuable advice when it matters.

Standard information reporting

For FoodSwift, I negotiated a balanced approach to information rights by creating three tiers of reporting. This is what I created:

Monthly Reporting (Light)

“The Company shall provide to the Investor the following monthly reports within fifteen (15) days of each month-end:

(a) Key Performance Indicators dashboard showing user growth, transaction volume, and other metrics agreed by the Board;

(b) Cash position and burn rate summary; and

(c) Brief management commentary on significant developments or deviations from plan.”

This lightweight monthly reporting gave Altitude Ventures visibility into critical metrics without overwhelming FoodSwift’s small team. Take note of how I avoided requiring full financial statements monthly—a common mistake a lot of lawyers make in seed-stage SHAs.

Quarterly Reporting (Comprehensive)

“The Company shall provide to the Investor the following quarterly reports within thirty (30) days of each quarter-end:

(a) Unaudited financial statements (balance sheet, income statement, and cash flow statement);

(b) Performance against budget with variance analysis;

(c) Updated business plan and forecast for the next two quarters; and

(d) Product development roadmap and milestones achieved.”

This quarterly reporting provided deeper insights, but with reasonable preparation time. The 30-day delivery window was crucial. Many SHAs mistakenly require unrealistic 15-day delivery for comprehensive quarterly documents, which puts an unnecessary burden on the management.

Annual Reporting (Formal)

“The Company shall provide to the Investor within ninety (90) days after the end of each financial year:

(a) Unaudited financial statements in accordance with applicable accounting standards;

(b) Annual business plan and budget for the following financial year, as approved by the Board; and

(c) Detailed capitalisation table showing all shareholdings and outstanding convertible instruments.

The Investor acknowledges that audited financial statements will be made available to the Investor Director as part of the board approval process in accordance with the statutory timeline under the Companies Act, 2013, and need not be separately provided under these information rights.”

Audited financials are not included in the 90-day timeline as they follow the statutory process under the Companies Act (board approval, AGM presentation, and RoC filing), which typically extends beyond 90 days.

Since the Investor has board representation, they already have access to audited statements through their director. Unaudited statements provide timely information while the statutory audit process proceeds.

Inspection and visitation rights

Beyond regular reporting, investors typically seek the right to inspect records and visit company premises.

For FoodSwift, I crafted the following clause:

“Upon reasonable notice of not less than seven (7) business days, the Investor shall have the right to:

(a) Inspect the books, records, and facilities of the Company during normal business hours;

(b) Meet with key management personnel; and

(c) Receive reasonable responses to information requests,

provided that such rights shall not be exercised more than twice in any financial year and shall not unreasonably disrupt the Company’s operations, except in cases of suspected fraud, material breach of this Agreement, or as required by law, subject to reasonable notice and board approval.”

The frequency limitation was critical. Without it, investors can inadvertently burden startups with constant inspections.

Strategic drafting considerations

1. Right-size for your stage

Information rights should scale as the company matures. What I designed for FoodSwift’s seed stage would have been insufficient for a Series B company but would crush a pre-seed startup.

2. Consider resources

FoodSwift had a part-time finance person, not a CFO. Their reporting requirement reflected this reality. Priya brought this fact to my attention during negotiations. She said, “We cannot promise detailed cohort analysis as we do not have a data team yet.“

3. Technology specifications

Modern SHAs should address information delivery methods:

“All reports may be delivered electronically via email or secure data room, and the Company shall make reasonable efforts to standardize report formats for consistency and efficiency.”

This seemingly minor clause smoothens the communication channel between the management and the investors.

4. Confidentiality protections

You would not want information rights granted to investors under the SHA to be exploited. What I mean is you would not want the proprietary information of your client to be disclosed to the public or unnecessary third parties by the Investors. Therefore, always pair information rights with confidentiality:

“All information provided to any Shareholder pursuant to these information rights shall be treated as Confidential Information subject to Section [X] of this Agreement. Corporate Shareholders may disclose such information to their regulators or shareholders as required by law, provided they notify the Company in advance and seek to limit disclosure to the extent legally permissible. Otherwise, no Confidential Information shall be disclosed to third parties without the Company’s prior written consent.”

This cross-reference ensures that inspection rights do not become a back door for data/information leakage.

Practical tips from hands on experience

I have seen information rights become surprisingly contentious during implementation. Here is my 2 cents on how you can avoid common pitfalls:

Define “Promptly” – Vague terms like “promptly provide” or “reasonable access” invite conflict. Use specific timeframes instead.
Include format specifications – Clarify whether financial reports must follow specific accounting standards from the beginning.
Address special requests – Include parameters for ad-hoc information requests:

“The Company shall make reasonable efforts to respond to the Investor’s reasonable requests for additional information not covered above, provided such requests are not unduly burdensome and pertain to material business matters.”

Consider Board vs. Shareholder Information – Some information may flow through board meetings rather than direct investor reporting. Clarify these channels to avoid duplication.

For FoodSwift, I found a middle ground that gave Altitude the updates it needed without overwhelming the startup.

When their investor tried to request weekly reporting, I simply asked: “Would you prefer they spend time building reports or building the product you invested in?” This framing helped secure reasonable terms.

With information rights established, shareholders now have visibility, but what controls their ability to exit? This brings us to transfer restrictions, the next critical piece of your SHA architecture.

Transfer restrictions: Controlling the exits

“What do you mean I cannot sell my shares if I want to?” Priya asked, looking concerned as I reviewed the transfer restriction clauses in our draft SHA.

“It is not that you cannot sell,” I clarified. “It is that there is a process to follow, giving existing shareholders certain rights before you sell to an outsider.”

This conversation highlights why transfer restrictions are simultaneously the most technical and most practical aspects of any SHA.

They directly impact shareholders’ ability to liquidate their investment, the ultimate goal of most startup stakeholders.

Why transfer restrictions matter

In public companies, shareholders can sell shares freely on stock exchanges or in the open market. But in private startups like FoodSwift, unrestricted transfers could lead to disastrous outcomes. Let me share how: –

Competitor infiltration: Without restrictions, a competitor could buy shares and gain access to confidential information
Fragmented cap table: Multiple small shareholders can complicate governance and future fundraising
Misaligned shareholders: New shareholders might not share the company’s vision, goals, objectives or timeline
Valuation volatility: Random share sales could establish problematic valuation precedents

I told FoodSwift’s founders that they should “Think of transfer restrictions like a bouncer at an exclusive club. They do not prevent people from entering, they just ensure everyone who comes in meets certain criteria and follows the rules.“

The core transfer restriction mechanisms

For FoodSwift’s SHA, I implemented four interlocking mechanisms that create a balanced framework for share transfers:

1. Right of First Refusal (ROFR)

ROFR gives existing shareholders the right to purchase shares being sold to a third party on the same terms offered by that third party. For example, if Zomato offers to buy Priya’s shares at ₹100 each, Priya must first offer those shares to Rahul and Altitude Ventures at the same price of ₹100. Only if Rahul and Altitude decline can Priya then sell to Zomato.

“If any Shareholder (the “Selling Shareholder”) receives a bona fide offer from a third party (the “Proposed Transferee”) to purchase any or all of its Shares and wishes to accept such offer, the Selling Shareholder shall first offer such Shares to the other Shareholders (the “Non-Selling Shareholders”) by delivering a written notice (the “Transfer Notice”) containing:

(a) The number of Shares proposed to be transferred (the “Offered Shares”);

(b) The identity of the Proposed Transferee;

(c) The price per Share and other material terms; and

(d) A statement that the offer is bona fide.

The Non-Selling Shareholders shall have thirty (30) days from receipt of the Transfer Notice to exercise their right to purchase all (but not less than all) of the Offered Shares on the same terms offered by the Proposed Transferee, proportionate to their existing shareholding.”

The key elements here are:

requirement for a legitimate third-party offer first
complete disclosure of terms and buyer identity
a reasonable timeframe for existing shareholders to decide
the “all or nothing” requirement prevents cherry-picking

2. Right of First Offer (ROFO)

While ROFR applies after a third-party offer, ROFO requires shareholders to first offer their shares to existing shareholders before seeking external buyers. For instance, if Rahul wants to sell his shares, he must first offer them to Priya and Altitude Ventures for ₹100 each. Only if they decline can Rahul then approach outside buyers, and he cannot sell for less than ₹100.

“Any Shareholder wishing to transfer any of its Shares (the “Offering Shareholder”) must first offer such Shares to the other Shareholders (the “Offeree Shareholders”) by delivering a written notice (the “ROFO Notice”) specifying:

(a) The number of Shares it wishes to transfer; and

(b) The minimum price at which it is willing to sell.

The Offeree Shareholders shall have twenty-one (21) days to accept this offer. If the Offeree Shareholders do not purchase all offered Shares, the Offering Shareholder may, within ninety (90) days, sell the remaining Shares to any third party at a price not less than that specified in the ROFO Notice.”

Notice the strategic differences from ROFR:

no third-party offer is needed to trigger the process
selling shareholder sets the initial price
a limited window for external sale if internal shareholders decline
external sale price cannot be lower than what was offered internally

For FoodSwift, I structured these provisions sequentially as follows:

‘A Shareholder wishing to transfer Shares shall first comply with the ROFO process under Clause [X]. If no Offeree Shareholders exercise their ROFO rights within 21 days, the Offering Shareholder may seek a third-party offer, subject to the ROFR process under Clause [Y], which must be completed within 30 days of the Transfer Notice. If both processes lapse, the Shareholder may transfer the Shares to a third party within 90 days, subject to the terms of the ROFO Notice.‘

This sequential structure creates a comprehensive protection framework while providing clear timelines for each step.

3. Tag-Along Rights (Co-Sale Rights)

Tag-along protects minority shareholders when majority shareholders sell, allowing them to participate proportionately in the sale on the same terms. What it means is, if Priya and Rahul (as majority shareholders) decide to sell their shares to Swiggy for ₹100 each, Altitude Ventures can “tag along” and require Swiggy to also buy their shares at the same ₹100 price.

“If Shareholders holding more than 25% of the Company’s Shares (the “Selling Majority”) propose to sell their Shares to a third party, all other Shareholders (the “Tagging Shareholders”) shall have the right to participate in such sale on the same terms, proportionate to their shareholding.

The Selling Majority shall provide written notice of the proposed sale, and Tagging Shareholders shall have fifteen (15) days to exercise their tag-along rights by written notice. The third-party purchaser must purchase the Tagging Shareholders’ Shares on the same terms, failing which the Selling Majority may not proceed with their sale.”

This provision was particularly important for Altitude Ventures as a minority investor, protecting them from being left behind if the founders found a buyer for only their shares.

4. Drag-Along Rights

Drag-along allows majority shareholders to force minority shareholders to join in a company sale, preventing small shareholders from blocking beneficial exits. For example, if Priya and Rahul (holding over 75% together) want to sell the entire company to Amazon at ₹100 per share, they can force Altitude Ventures to also sell their shares to Amazon at the same ₹100 price.

“If Shareholders holding at least 75% of the Company’s issued and outstanding Shares (the “Dragging Shareholders”) wish to sell all their Shares to a third party who has offered to purchase 100% of the Company, the Dragging Shareholders may require all other Shareholders to sell their Shares to such third party on the same terms.

The Dragging Shareholders shall provide written notice of such sale, and all Shareholders shall be obligated to take all necessary actions to facilitate the transaction, including voting their Shares in favor of the sale and executing all required documentation. This right shall be exercised in compliance with Sections 180 and 100 of the Companies Act, 2013, including convening an extraordinary general meeting if required.”

In FoodSwift’s case, we set the drag-along threshold at 75%—high enough to prevent the investor (with 13.04%) from being dragged without consent, but low enough to enable a clean exit if a supermajority of shareholders approved.

Exemptions: Permitted transfers

Every transfer restriction framework needs reasonable exemptions. For FoodSwift, I included:

“Notwithstanding the above restrictions, the following transfers (“Permitted Transfers”) may be made without triggering ROFR or ROFO:

(a) Transfers between Founders, provided the transferee executes a Deed of Adherence;

(b) Transfers to wholly-owned Affiliates of the transferring Shareholder;

(c) Transfers to immediate family members for estate planning purposes; and

(d) Transfers pursuant to the exercise of tag-along or drag-along rights.”

These exemptions preserved flexibility while maintaining the protective intent of the restrictions.

Enforcing transfer restrictions under Companies Act

You should know that transfer restrictions must align with Companies Act, 2013 and its corresponding rules to be enforceable. Section 56 of the Companies Act governs share transfers and acknowledges that private companies may have restrictions in their Articles of Association.

For FoodSwift, I ensured enforceability through these approaches:

Articles Alignment: We duplicated key restrictions in the Articles of Association, making them binding on all future shareholders as required by Section 58 of the Companies Act, 2013
Board Approval Mechanism: We included a provision that the Board may refuse share transfer registrations that violate the SHA
Legend on Share Certificates: We required physical share certificates to contain a legend noting the existence of transfer restrictions
Deed of Adherence: All share transferees must execute a Deed of Adherence as a condition of transfer, ensuring they are bound by the SHA provisions

Drafting tips for effective transfer restrictions

Based on my experience with dozens of startups, here are the key considerations that you must consider when drafting transfer restriction provisions:

1. Timeframes Matter

Set realistic timeframes for each step:

Too short: Shareholders cannot properly evaluate opportunities
Too long: Transfer processes become impractically delayed

FoodSwift’s 21-day ROFO and 30-day ROFR periods struck a good balance.

2. Address partial transfers

Clarify whether rights apply to all-or-nothing transfers or can be exercised partially. For FoodSwift’s ROFR, I required non-selling shareholders to purchase all offered shares to prevent cherry-picking.

3. Valuation mechanisms

Include a valuation procedure for situations where fair market value must be determined:

“If the fair market value must be determined for any purpose under this Agreement, it shall be determined by an independent valuer mutually appointed by the Shareholders, or failing agreement, by a panel of three valuers, one appointed by the Founders, one by the Investor, and one jointly appointed by the two valuers.”

4. Consider practical mechanics

Address the practical aspects of transfer processes:

Who administers the notices?
How are simultaneous exercises of rights handled?
What happens if only some shareholders exercise their rights?

With transfer restrictions done, it is time that I draw your attention to founder lock-in and restrictive covenants. These provisions ensure founders remain physically and competitively aligned with the company’s interests.

Founder Lock-in, Non-Compete & Non-Solicit: Securing Commitment

Rahul, while tapping the draft lock-in clause with his pen, said, “Three years seems excessive. What if this does not work out? We would be stuck.“

Across the table, Altitude’s representative was equally firm. “We are investing in you two as much as the business. Without you, there is no FoodSwift.“

I observed this exchange with interest.

Founder restrictions—particularly lock-in periods and non-competes—are among the most personally impactful provisions in any SHA.

They directly limit founders’ freedom to walk away or start competing ventures. Yet they are also among the most reasonable investor requests, who wants to invest in a company whose creators might leave tomorrow?

This tension makes founder restriction clauses both critically important and emotionally charged.

The core purpose of founder restrictions

Before diving into clause specifics, it is worth understanding the legitimate rationales behind these provisions:

Ensuring commitment: Investors want founders fully dedicated to making the company succeed
Protecting IP and strategy: Preventing founders from taking critical knowledge to competitors
Alignment of timelines: Creating shared understanding of the minimum time commitment expected
Team stability: Preventing key talent exodus by prohibiting the solicitation of employees

“These provisions are not about trapping you. They are about creating shared expectations around commitment. Your investor is saying they need at least X years of your full focus to give this venture a fair chance.” I explained to Rahul and Priya.

The three pillars of founder restrictions

For FoodSwift, we negotiated a balanced set of restrictions across three dimensions:

1. Founder Lock-in Provisions

Lock-in clauses directly prevent founders from leaving the company during a specified period. Here is what I drafted for FoodSwift:

“The Founders hereby agree to continue their full-time employment with the Company for a period of three (3) years from the Effective Date (the “Lock-in Period”). During the Lock-in Period, the Founders shall:

(a) Devote their full time, attention, and abilities to the business of the Company;

(b) Not engage in any other business activity without prior written consent of the Investor;

(c) Use their best efforts to promote the interests of the Company; and

(d) Comply with all terms of their respective Employment Agreements.

If any Founder ceases to be employed by the Company during the Lock-in Period for any reason other than:

(i) Death or permanent disability;

(ii) Termination by the Company without cause; or

(iii) Material breach by the Company of the Founder’s Employment Agreement,

then such Founder shall be deemed a “Departing Founder” and shall be subject to the Share Forfeiture provisions in Clause [X].

The Lock-in Period is intended to align economic incentives and shall not be construed as compelling continued employment contrary to the Specific Relief Act, 1963. ‘Termination without cause’ means termination not due to willful misconduct, gross negligence, or material breach of the Employment Agreement, as determined by the Board in good faith.”

The key elements here are:

specific time commitment (three years)
full-time dedication requirement
limited exceptions for circumstances beyond the founders’ control
consequences tied to share forfeiture rather than direct penalties

I intentionally avoided monetary penalties or liquidated damages, which can be legally problematic in India under contract law principles against penalty clauses.

2. Non-Compete provisions

Non-compete clauses prevent founders from working with competitors or starting competing businesses. However, they face significant enforceability challenges in India, where courts are reluctant to prevent individuals from earning a livelihood.

For FoodSwift, I drafted narrowly tailored provisions with reasonable scope:

For a period of one (1) year following the termination of their employment with the Company for any reason, the Founders shall not, directly or indirectly:

(a) Engage in any business that directly uses or exploits the Company’s trade secrets or proprietary algorithms for connecting home chefs with customers for food delivery within India;

(b) Hold more than 5% equity interest in any competing business; or

This restriction shall be limited to:

(i) The specific business model of home chef food delivery services;

(ii) Geographic markets where the Company has active operations at the time of the Founder’s departure; and

(iii) Shall not prevent the Founder from earning a livelihood in unrelated sectors of the food or technology industries.

The parties acknowledge that this narrowly tailored restriction is necessary to protect the Company’s legitimate business interests in its trade secrets and proprietary technology.”

Notice the careful limitations that improve enforceability:

reasonable duration (2 years, not 3-5 years)
specific business definition (not all food tech, just home chef delivery)
geographic limitation to the actual markets served
small passive investment allowance (5% equity)

3. Non-Solicitation Provisions

Non-solicitation prevents founders from poaching employees, suppliers, or customers after leaving the company. These provisions typically face fewer enforceability challenges than non-competes:

“For a period of one (1) year following the termination of their employment with the Company for any reason, the Founders shall not, directly or indirectly:

(a) Solicit, induce, or encourage any employee or consultant of the Company to leave their position;

(b) Hire or engage any person who was an employee or consultant of the Company during the preceding 12 months;

(c) Solicit or entice any customer, supplier, or business partner of the Company with whom they developed a relationship through their engagement with the Company to terminate or reduce their relationship with the Company; or

(d) Interfere with any relationship between the Company and its customers, suppliers, or business partners.

This restriction shall not apply to pre-existing personal relationships that the Founder maintained before their association with the Company, provided these relationships were disclosed to the Company prior to the Effective Date.”

This comprehensive provision protected FoodSwift’s human capital and business relationships without preventing founders from working entirely.

Balancing enforcement and personal freedom

The tension in founder restriction clauses lies in balancing legitimate business protections with personal freedom. For FoodSwift, I incorporated several balancing elements:

1. Vesting-based enforcement

Rather than direct penalties, I tied lock-in compliance to equity vesting:

“The Shares held by the Founders shall be subject to reverse vesting as follows:

(a) 25% of the Shares shall be deemed vested on the Effective Date;

(b) The remaining 75% shall vest in equal monthly installments over the Lock-in Period.

If a Founder becomes a Departing Founder, any unvested Shares shall be subject to repurchase by the Company at the lower of:

(i) The original purchase price; or

(ii) Fair Market Value as determined in accordance with Clause [X].”

This approach created meaningful consequences for early departure while avoiding punitive damages that might not be enforced.

2. Graduated restrictions

The restrictions in FoodSwift’s SHA diminished over time:

full lock-in for three years
non-compete and non-solicit for two years after departure
confidentiality obligations indefinitely

This tiered approach acknowledged that founders’ ability to harm the company decreases over time.

3. Limited scope carve-outs

I included specific carve-outs for activities outside the company’s core focus:

“Notwithstanding the foregoing restrictions, the Founders may:

(a) Make passive investments in publicly traded companies;

(b) Engage in academic, teaching, or research activities;

(c) Participate in industry associations and conferences; and

(d) Engage in charitable or community activities,

provided such activities do not materially interfere with their obligations to the Company.”

These carve-outs preserved reasonable personal freedom while maintaining the protective intent.

Enforceability under Companies Act

A crucial consideration in drafting founder restrictions is their enforceability under Indian law. Here is what you need to know:

Lock-in Provisions: Generally enforceable through equity vesting mechanisms, though direct monetary penalties may be problematic.
Non-Compete Clauses: Face significant enforceability challenges under Section 27 of the Indian Contract Act, which declares void agreements that restrain trade. Courts typically will not enforce post-employment non-competes unless:

They are extremely narrow in scope
They are limited to a reasonable time period
They protect legitimate business interests
They do not prevent earning a livelihood

Non-Solicitation: More likely to be enforced, especially when limited to actual relationships and reasonable time periods.

For FoodSwift, I addressed these realities by having an open discussion.

“I need to be straight with everyone,” I told both founders and investors during negotiations. “The non-compete may have limited enforceability in Indian courts. It is more valuable as a deterrent and statement of expectations than as a litigation tool.“

This transparency led to a more balanced provision that all parties understood and found reasonable.

Strategic drafting tips

Based on my experience with multiple startups, here are the key considerations for effective founder restriction clauses:

1. Right-size for stage and investment

Founder restrictions should scale with investment size and company stage:

Pre-seed/Angel: Minimal restrictions, often just vesting
Seed (FoodSwift’s stage): Moderate lock-in (2-3 years) and narrowly tailored non-compete/non-solicit
Series A and beyond: More comprehensive restrictions with stronger enforcement mechanisms

2. Align with economic reality

Restrictions should reflect founders’ economic incentives:

Minimal salary but high equity? Shorter lock-in period
Competitive salary? Longer lock-in may be reasonable
Consider acceleration provisions tied to company success milestones

3. Build in flexibility

Include mechanisms for board-approved exceptions:

“The Board, including the affirmative vote of the Investor Director, may waive or modify the application of these restrictions in specific instances where the Board determines such waiver is in the Company’s best interest.”

This clause preserved flexibility for unforeseen circumstances.

4. Address material changes

Account for how restrictions apply if the company pivots:

“If the Company substantially changes its business focus through board approval, the non-compete restrictions shall apply to the new business focus rather than the business described herein.”

With these provisions, I addressed shareholders’ physical and competitive commitment to the company. But what about the company’s intellectual assets?

Next, I will explore confidentiality and IP assignment provisions—the shields that protect FoodSwift’s most valuable intangible assets.

Confidentiality & IP assignment obligations: Protecting the crown jewels

“We already signed NDAs when we started the company. Why do we need more confidentiality provisions in the SHA?” Priya asked as we reviewed the draft agreement.

Her question was common among founders who see confidentiality as a standard legal formality rather than a strategic asset protection mechanism.

I explained by saying, “Your NDA covers basic confidentiality. But the SHA needs to address who owns the intellectual property created by founders, employees, and consultants—and what happens to confidential information if someone leaves the cap table.“

For technology startups like FoodSwift, intellectual property and confidential information are not just legal concerns; they are the crown jewels of the business.

Their recommendation algorithm connecting home chefs with local customers was their primary competitive advantage. Protecting these assets requires robust provisions in the SHA.

Distinguishing confidentiality from IP ownership

The first concept I clarified for FoodSwift’s founders was the distinction between confidentiality and IP ownership:

Confidentiality concerns keep information secret
IP Assignment concerns who legally owns and controls assets recognised under intellectual property laws.

A comprehensive SHA needs to address both.

You can own IP without it being confidential (like a registered patent), and you can have confidential information that is not protectable IP (like customer lists). The strongest protection comes from addressing both dimensions.

Comprehensive confidentiality provisions

For FoodSwift, I crafted multi-layered confidentiality provisions tailored to their business needs:

1. Scope of confidential information

The definition of confidential information sets the foundation:

“Confidential Information” means all information of any kind, whether communicated orally, in writing, or observed directly, that:

(a) Relates to the Company’s business, technology, customers, or operations;

(b) Is designated as confidential by the Company; or

(c) Would reasonably be understood to be confidential given its nature or the circumstances of disclosure,

including but not limited to: software code, algorithms, business plans, customer data, financial information, marketing strategies, unpatented inventions, and trade secrets, but excluding information that:

(i) Is or becomes publicly available through no fault of the receiving party;

(ii) Was rightfully known to the receiving party prior to receipt;

(iii) Is rightfully obtained by the receiving party from a third party without restriction; or

(iv) Is independently developed by the receiving party without use of Confidential Information.”

Notice how this definition is both comprehensive and precisely limited by specific exclusions. This balanced approach is more likely to be enforced by courts.

2. Confidentiality obligations

The actual obligations extend beyond simply not sharing information:

“Each Shareholder agrees to:

(a) Maintain the strict confidentiality of all Confidential Information;

(b) Use Confidential Information solely for purposes of supporting the Company’s business;

(d) Implement reasonable security measures to protect Confidential Information;

(e) Promptly notify the Company of any unauthorized disclosure or use; and

(f) Return or destroy all Confidential Information upon request or termination of relationship with the Company.”

These multilayered obligations create comprehensive protection rather than a simple “don’t tell” requirement.

3. Duration and survival

Unlike many SHA provisions that terminate when a shareholder exits, confidentiality obligations extend beyond:

“The confidentiality obligations in this Agreement shall:

(a) Remain in effect during the term of this Agreement; and

(b) Survive the termination of this Agreement or a Shareholder’s exit for:

(i) A period of three (3) years for general Confidential Information; and

(ii) Indefinitely for information qualifying as trade secrets under applicable law, provided such trade secrets remain non-public and are actively protected by the Company.”

This tiered approach recognises that some information (like customer lists) has a limited shelf life, while other information (like algorithms) retains value indefinitely.

4. Permitted disclosures

Absolute confidentiality obligations are impractical. We included reasonable exceptions:

“Notwithstanding the foregoing, Shareholders may disclose Confidential Information:

(a) To their representatives who need to know such information, provided they are bound by equivalent confidentiality obligations;

(b) As required by law, regulation, or court order, provided the Company receives prior notice and the opportunity to seek a protective order; or

These exceptions prevented the confidentiality provisions from impeding legitimate business activities while maintaining core protections.

Robust IP assignment framework

Equally important to confidentiality are provisions ensuring all intellectual property developed for the company actually belongs to the company. For FoodSwift, I implemented a comprehensive framework:

1. Retrospective assignment

First, we addressed the existing IP with a comprehensive transfer:

“Each Founder hereby irrevocably assigns to the Company all right, title, and interest worldwide in and to any and all Intellectual Property that:

(a) Relates to the Company’s business or anticipated research and development;

(b) Was developed, created, or reduced to practice prior to the Effective Date; and

This assignment includes all rights to apply for, register, and enforce such Intellectual Property, and all claims for past infringement.

The specific pre-existing Intellectual Property covered by this assignment shall be listed in Schedule [X] attached to this Agreement, with mutual agreement on the scope and valuation of such IP. Intellectual Property not listed in Schedule [X] shall remain the property of the respective Founder, subject to the Company’s non-exclusive license to use such IP as necessary for its business.”

This provision captured Priya’s algorithm work that predated FoodSwift’s incorporation—a critical asset that needed clear ownership.

2. Prospective assignment

We also addressed future IP development:

“Each Founder agrees to promptly and fully disclose to the Company all Intellectual Property that the Founder may solely or jointly conceive, develop, or reduce to practice during their engagement with the Company that:

(a) Results from work performed for the Company;

(b) Relates to the Company’s business or anticipated research; or

Each Founder hereby irrevocably assigns all such Intellectual Property to the Company upon creation.”

The “upon creation” language created automatic transfer without requiring additional documentation for each new development.

3. Definition of Intellectual Property

The effectiveness of IP provisions depends on comprehensive definitions:

“Intellectual Property” means any and all:

(a) Inventions, discoveries, improvements, ideas, processes, formulas, techniques, know-how, and data, whether patentable or not;

(b) Works of authorship, including software, source code, documentation, and designs;

(d) Trade secrets and confidential business information;

(e) Patents, patent applications, and patent rights;

(f) Copyrights and copyright registrations; and

(g) All other intellectual property and proprietary rights in any jurisdiction.”

This expansive definition ensured no valuable creations fell through definitional gaps.

4. Further assurances

To address potential execution challenges, we included a “further assurances” clause:

“Each Founder agrees to:

(a) Execute any documents and take any actions reasonably requested by the Company to effectuate the assignments above;

(b) Assist the Company in obtaining, maintaining, and enforcing IP rights; and

The Company shall reimburse reasonable expenses incurred in providing such assistance.”

This provision created a continuing obligation to help perfect the company’s IP rights, even after assignment.

5. Power of attorney

For additional security, we included a limited power of attorney:

“Each Founder hereby irrevocably appoints the Company as their attorney-in-fact to execute documents on their behalf to effectuate the assignments herein if the Founder is unavailable or unwilling to do so within 10 days of a reasonable request.”

This mechanism prevented IP transfers from being blocked by an unresponsive founder, particularly important in adversarial situations.

Special considerations for startups like FoodSwift

Every startup has unique IP considerations. For FoodSwift’s food-tech platform, i added tailored provisions:

1. Data Ownership and Privacy

“All data collected through the Company’s platform, including but not limited to customer preferences, ordering patterns, chef performance metrics, and delivery data, shall be the exclusive property of the Company.

Each Shareholder acknowledges that such data is subject to the Digital Personal Data Protection Act, 2023, other applicable privacy laws, and the Company’s privacy policy. Each Shareholder agrees not to use or disclose such data except in compliance with these laws and policies. The Company shall obtain valid user consent and implement data protection measures as required by law for all data collection activities.”

This provision addressed FoodSwift’s valuable data assets while acknowledging privacy compliance requirements.

2. Third-Party Components

For their technology stack that included open-source components, I added:

“The Company shall maintain a register of all third-party and open-source software components used in its products, including license terms.

No Founder shall incorporate open-source components with licenses that would require the Company to disclose its proprietary source code. The Company shall conduct annual audits of its software stack to ensure compliance with open-source license terms, with results reported to the Board.

The Company shall file for trademark and copyright registrations within six months of the Effective Date, with progress reported to the Board quarterly.

The power of attorney granted to the Company shall be limited to executing documents necessary to perfect IP assignments or registrations, and shall not extend to other founder obligations.”

This protects against inadvertent IP contamination through copyleft open-source licenses.

3. User-Generated Content

For content created by home chefs on the platform:

“The Company shall obtain appropriate licenses for all user-generated content displayed on its platform, while allowing content creators to retain underlying ownership where appropriate.”

This balanced approach protected FoodSwift while respecting chef content ownership.

Legal enforceability considerations

When drafting IP and confidentiality provisions for Indian startups, several legal factors require attention:

1. Registration Requirements

Under Indian IP law, certain rights require registration:

“The Company shall promptly file for registration of all registrable Intellectual Property, including trademarks for the ‘FoodSwift’ name and logo, and copyright registrations for key software components.”

2. Employment Law Implications

I addressed the intersection with Indian employment law:

“These IP assignment provisions supplement and do not replace any IP assignments in Founders’ Employment Agreements. In case of conflict, the provision offering the Company the broadest protection shall prevail.”

3. Jurisdictional Considerations

For FoodSwift’s potential international expansion:

“These IP assignments extend to all jurisdictions worldwide where such rights may be recognized. Each Founder agrees to execute jurisdiction-specific assignments where necessary for local registration or enforcement.”

With these provisions, FoodSwift created a comprehensive protective framework for its most valuable intangible assets—the code, algorithms, data, and business strategies that differentiated it in the market.

Together with the governance, transfer restriction, and founder commitment provisions I have covered, FoodSwift now has a complete alignment and protection framework in its SHA. Next, let us synthesize everything into a comprehensive checklist that will serve as your guide for drafting effective SHAs for early-stage startups.

Conclusion: foundations of control & alignment

As I wrap up our exploration of the first two critical dimensions of shareholders’ agreements, let us take a moment to understand what I have built for FoodSwift so far.

In Part 1, I established the governance foundation of a successful SHA by:

creating precise definitions that shape how rights and obligations function
documenting clear shareholding structures that show exactly who owns what
designing a balanced board composition that preserves founder control while giving investors appropriate representation
crafting reserved matters that protect investor interests without paralysing day-to-day operations

Then in Part 2, I added the protection framework that keeps everyone aligned by:

implementing information rights that balance investor visibility with founder efficiency
creating transfer restrictions that prevent harmful share sales through ROFR, ROFO, tag, and drag mechanisms
establishing founder commitments through carefully calibrated lock-in, non-compete, and non-solicit provisions
protecting the company’s intellectual assets through robust confidentiality and IP assignment clauses

Together, these provisions create what I like to call the “governance house” – a structure with solid foundations (control and decision-making) and secure locks on the doors and windows (alignment and protective boundaries).

But a complete SHA needs one more critical dimension – the economic framework that determines how value is protected and ultimately realised. That is what I will explore in Part 3.

Stay tuned for “Part 3 — Protecting the Payoff: Drafting Anti-Dilution, Exit, and Liquidation Clauses for FoodSwift’s SHA,” where I will cover:

how to translate term sheet economics into precise SHA language
anti-dilution protections that safeguard investors in down rounds
exit mechanisms that provide liquidity pathways for all shareholders
liquidation preferences that determine who gets paid what and when
practical drafting strategies that balance founder and investor interests in economic provisions

The governance and alignment provisions that I covered so far create the playing field, but the economic provisions in Part 3 will determine how the score is kept and who ultimately wins.

See you in Part 3, where I will complete the rulebook with the provisions that protect the ultimate payoff for all shareholders.

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