VC contract terms get tougher on founder shares after governance lapses

Venture capital firms have begun enforcing tougher contractual terms at startups to raise the cost of founder misconduct, with new data indicating that founders removed for financial irregularities can forfeit even shares that have already vested.

Almost 76% of the 108 Indian private companies that raised venture capital in 2025 imposed what Boolean Legal calls the “Nuclear Option” on a founder removed for cause—loss of both vested and unvested shares at face value or cost, according to a study by the law firm, which specialises in startup deals and mergers and acquisitions.

Vested shares are shares that founders have earned over time by staying with and building the company. Unvested shares are those that have not yet been earned. In simple terms, the report says that most of the companies reviewed now allow even earned shares to be taken back by the investors at a token price in serious cases of misgovernance. Only 2.8% allow founders to retain vested shares after such termination.

The findings come after governance blowups at startups such as Byju’s, BharatPe, GoMechanic, Trell, and Mojocare, among others, where financial reporting, boardroom disputes, or alleged irregularities put founder conduct under scrutiny. The report does not study these cases directly, but lawyers and early-stage investors said such episodes have made founder-share clauses a bigger part of venture negotiations.

Lalu John Philip, founder of Boolean Legal and author of the report, said the change is clearest in the treatment of vested shares. Five years ago, the view that vested shares were “earned” and could therefore be retained by founders was more widely accepted, he said.

The current practice, where founders can lose even vested shares for serious misconduct, “seems to be a response to the governance incidents of the last few years”, and is intended by investors as an economic disincentive against misconduct, Philip said.

The BharatPe-Ashneer Grover dispute shows how founder shares can become central in a governance tussle. In December 2022, news agency PTI reported that BharatPe had filed an arbitration to claw back Grover’s founder title and 1.4% unvested shares. Grover then held about 8.5% in the company, including the unvested portion.

A lawyer, who requested not to be named, said that while the BharatPe matter was part of a wider dispute that was later settled, it was one of the reasons why investors became more focused on founder-share provisions when governance issues arise.

Suraj Malik, founder and CEO of Legacy Growth, a multi-family office, said he has seen the report’s findings play out in contracts. “There is an increased trend of putting conditions for clawing back vested shares into agreements. Contractually, that trend is there, and it works as a deterrent,” he said.

But enforcement is a different matter, said Malik. In founder-led startups, investors may hesitate to act because removing the founder can hurt the company. “Contractually, it is there everywhere. But on enforcement, there is hesitation to hurt the founder for matters that can be cured or rectified,” he said.

Corporate-backed ventures and family office-backed businesses are more likely to enforce such rights because they believe they have the ability to run the business even without the founder, said Malik.

Early-stage investors said such clauses are meant for fraud, fund diversion, self-dealing or deliberate misreporting, not routine disagreements.

“The company needs enough equity to bring in someone else, but ordinary disputes should not be treated the same way as fraud,” one investor said.

Rohit Jain, managing partner, Singhania & Co., said investor-friendly provisions on founder shares have existed in early-stage deals for years. What has changed, he said, is founder awareness and sharper negotiation on wording.

According to Jain, earlier, many founders prioritised closing the funding round and accepted one-sided documents. Now, after high-profile founder-investor disputes, and the startup ecosystem getting more mature, the founders are more aware and push back on clauses that allow removal at the stage of an allegation or first information report.

“For example, the founders now negotiate to have the language be very tight so that only if there is proven fraud or proven cause, then only the ouster should happen,” Jain said.

For founders, lawyers said the key is to keep the bar high. Malik said any default should be proven through an independent process, not merely alleged. Philip said criminal triggers should not cover unrelated complaints, and where vested shares are bought back outside serious misconduct, founders should push for fair value.