If you are stuck in such a situation, here is what to do. 📝

A budding tech professional, Mr. Sameer Gupta, was approached by an aspiring entrepreneur, Mr. Rohan Verma, with an exciting idea for a new platform, “Project Nexus.” Mr. Verma made a verbal promise to Mr. Gupta: “We will be equal partners, 50/50 split in the company.” Trusting this promise, Mr. Gupta agreed to develop the Minimum Viable Product (MVP) without drawing any salary, pouring his time and expertise into the project.

However, when Mr. Verma presented the formal agreement, it told a completely different story. The document, titled “Co-creation & Intellectual Property Assignment Agreement,” referred to Mr. Verma as the sole “Founder” and Mr. Gupta merely as a “Contributor.” The agreement stipulated that all work, code, and intellectual property created by Mr. Gupta would be the exclusive property of Mr. Verma and his brand, “ConnectSphere.” It contained no mention of equity, partnership, or co-ownership. Instead, it was filled with one-sided clauses that protected only Mr. Verma, leaving Mr. Gupta with no rights and significant legal liabilities.

Advice in such cases 📜

This situation is a classic example of a “bait and switch,” where a verbal promise of partnership is used to obtain free work, while the written document formalizes an exploitative arrangement. The most critical advice is: DO NOT SIGN THIS AGREEMENT as it stands. A signed contract generally overrides any prior verbal discussions. This agreement turns you from a potential co-founder into an unpaid worker who is legally obligated to hand over all valuable creations and is then restricted from working on similar projects.

You must insist on a proper Founders’ Agreement that accurately reflects the initial understanding of partnership and equity. If the other party is unwilling to amend the agreement to be fair and equitable, it is a major red flag about their intentions and the future of your professional relationship.

Applicable Sections of Law ⚖️

While this is primarily a contractual issue, several Indian laws are relevant:

• The Indian Contract Act, 1872: This is the governing law for your agreement. A valid contract requires lawful consideration (something of value exchanged). Here, you receive no salary and no equity, which could make the contract voidable for lack of consideration. Furthermore, if you can prove the equity promise was made with no intention of honouring it, it could constitute fraud under Section 17.
• The Companies Act, 2013: A proper startup structure involves formally issuing shares. Sweat equity (shares given for expertise and work) is governed by Section 54 of this Act. This agreement completely bypasses the legal framework for establishing co-ownership in a company.
• The Copyright Act, 1957: As the creator of the software code, you are the first owner of its copyright. This agreement forces you to irrevocably assign those rights for nothing in return.
• The Arbitration and Conciliation Act, 1996: The clause forcing disputes into arbitration in Jabalpur is legally binding if signed. While arbitration can be faster than courts, it can also be expensive, and the designated location may be inconvenient for you.

If you are the complainant 🙋‍♂️

This section applies to you, as you are the one who has been presented with this unfair agreement.

• Do Not Sign: Reiterate this. Do not sign the document under any pressure.
• Demand Renegotiation: Insist on drafting a “Founders’ Agreement” or a “Co-Founder Agreement.” This document must clearly lay out the equity split, a vesting schedule (where you earn your equity over time), roles, responsibilities, decision-making powers, and intellectual property ownership (which should belong to the company, not an individual founder).
• Document Everything: Preserve all emails, text messages, and chat logs where the 50/50 equity split was discussed. This is your only leverage and potential evidence of the original intent.
• Seek Legal Advice: Before signing any revised document, have it reviewed by a lawyer who specializes in startup and corporate law. This is a small investment that can save you from immense future losses.

If you are the victim

This section is for those who might have already signed such a one-sided agreement.

• Assess Your Position: Your legal standing is weaker after signing, but not hopeless. You may be able to challenge the contract’s validity in court.
• Consult a Lawyer: Immediately seek legal counsel to explore options like challenging the contract on grounds of fraud, misrepresentation, or lack of consideration.
• Issue a Legal Notice: Your lawyer can send a formal legal notice to the other party, detailing the verbal promises and demanding that the agreement be rectified to reflect the original understanding or that you be compensated for your work.
• Prepare for Dispute Resolution: If negotiation fails, you may need to proceed with arbitration as specified in the contract or file a civil suit to claim your rights.

How the police behave in such cases 👮

This is a civil dispute, not a criminal one. The police will not intervene in a breach of contract case. If you go to a police station, they will advise you to approach a civil court. The only, very narrow, exception is if you can provide strong, irrefutable evidence that the founder’s intention was to cheat you from the very beginning. In such a scenario, a case under Section 318 of the Bharatiya Nyaya Sanhita (BNS), 2023, for cheating could potentially be filed, but this is rare in business disputes, as the police often view them as civil matters.

FAQs people normally have ❓

Is a verbal promise of equity legally binding?
Under the Indian Contract Act, a verbal agreement is valid. However, it is incredibly difficult to prove in court. When a written agreement exists, the court will almost always give it precedence under the “parol evidence rule,” which presumes the written contract is the final and complete version of the agreement.

What is a vesting schedule and why is it important?
A vesting schedule is a plan where co-founders earn their equity over a period of time, typically 3-4 years, often with a “one-year cliff” (meaning you get no shares if you leave in the first year). This protects the company from a founder leaving early with a large chunk of equity. The absence of any vesting or equity clause in your agreement is a massive red flag.

What evidence is required? 📄

To challenge the situation or renegotiate effectively, you need:

• Written Communications: Any emails, WhatsApp messages, or other chats that mention the promise of partnership or a 50/50 equity split.
• The Unfair Agreement: The draft agreement itself serves as evidence of the other party’s attempt to sideline you.
• Proof of Work: The code, designs, and other “Work Product” you have created. This demonstrates your significant contribution and the value you have brought to the project.
• Witnesses: If anyone else was privy to the conversations where equity was promised, their testimony could be valuable.

How long will the investigation take? ⏳

Since this is a civil matter, there is no police investigation. The timeline for resolution depends on the path you take:

• Negotiation: Could be resolved in a few weeks if the other party is reasonable.
• Arbitration: As per the clause, this is a faster alternative to court, typically taking 6 to 12 months to reach a conclusion.
• Civil Court: Filing a lawsuit in a civil court is a lengthy process and can take several years to be resolved due to backlogs and procedural delays.

Remember, preventing a legal problem by not signing an unfair agreement is far easier, cheaper, and less stressful than fighting to correct it later.

Advocate Sudhir Rao, Supreme Court of India