Founder Agreements

Everything on this page states the position as of July 2026; where a point turns on a current fee, filing period, or judicial trend, it is flagged for verification. It is general information for founders, not advice on your facts.

A founders' agreement exists because Pakistani company law is indifferent to the question founders care about most: whether a shareholder earned their shares. The Companies Act, 2017 will protect a co-founder's shareholding whether they work eighty-hour weeks or disappear after the first month. If you want a different rule — and every multi-founder startup should — you have to write it yourselves, as a contract, early, and with mechanics that work under Pakistani law rather than mechanics copied from a Delaware template.

What the default rules actually say

Incorporate a private company with the SECP's model articles and no side agreement, and the position between founders is roughly this. Each founder owns the shares subscribed in their name, permanently, regardless of contribution. Decisions at board level go by majority of directors; decisions at shareholder level go by the majorities the Act prescribes, which at 50/50 means no decision at all when the founders disagree. Directors owe their duties to the company, not to each other, so a founder who feels wronged by a co-founder usually has no direct claim worth bringing. There is no statutory vesting, no statutory leaver mechanism, and no statutory answer to deadlock in a solvent company short of the drastic remedies the Act reserves for oppression and winding up.

The Contract Act, 1872 will enforce an oral promise in principle, but an oral equity promise is a lawsuit, not a shareholding: shares in a Pakistani company come into existence through allotment or transfer and entry in the register of members, so the handshake claimant must first win a case and then compel the corporate steps. The gap between the default rules and what founders assume they agreed is the whole reason this document exists.

The decisions the agreement must record

A useful founders' agreement is short on recitals and long on decisions. At minimum it should record: the equity split and, in a recital, the reasoning behind it, because the reasoning is what gets re-argued later; vesting, covered below; each founder's role, time commitment, and remuneration, including whether anyone is permitted outside work; how decisions are made — which matters the CEO decides alone, which need the board, and which sit on a short reserved-matters list needing every founder's consent; restrictions on transferring shares, mirrored in the articles; a present-tense assignment to the company of all IP each founder has created or will create in connection with the business, including pre-incorporation work, which needs its own deed since the company could not own what was made before it existed; confidentiality; and what happens on departure, death, or incapacity of a founder.

Two clauses deserve more care than they usually get. The deadlock clause must end somewhere — escalation to a named mediator, then a defined buy-sell mechanism — because a clause that ends with "the founders shall discuss in good faith" ends nowhere. And the dispute resolution clause should be written for Pakistan as it is: court litigation is slow, so most founders' agreements choose arbitration, which as of mid-2026 sits under the Arbitration Act, 1940 for domestic seats [STATUS OF ARBITRATION REFORM LEGISLATION — TO BE VERIFIED BY REVIEWING LAWYER]. Name the seat, the rules, and the appointing authority now.

Vesting without a buyback

Founder vesting in Pakistan is built from contract, because the American mechanic does not travel. In a Delaware startup, the company repurchases a departing founder's unvested shares. A Pakistani company's ability to buy back its own shares is tightly constrained under the Companies Act, 2017, and the routes available to a private company are narrow enough that no sensible vesting scheme should depend on them [SECTIONS 88–89 AND AVAILABLE ROUTES — TO BE VERIFIED BY REVIEWING LAWYER].

The working design instead obliges the departing founder to transfer unvested shares to the continuing founders, or to a nominee they designate, at a price fixed by the agreement. Three supports make the obligation real. First, the articles: transfer restrictions and the vesting-linked transfer obligation should appear in the articles as well as the agreement, adopted by special resolution and filed with the SECP, so the company's own constitution backs the contract. Second, pre-signed transfer instruments held in escrow, so performance does not depend on a hostile ex-founder's signature; the enforceability of escrowed instruments depends on careful drafting and on stamp duty being handled when the transfer completes [MECHANICS AND STAMP TREATMENT — TO BE VERIFIED BY REVIEWING LAWYER]. Third, the Specific Relief Act, 1877: shares in a private company have no market equivalent, which is the classic ground on which a court orders actual transfer rather than damages — a remedy worth drafting toward deliberately.

Schedules follow global convention — four years with a one-year cliff is common — but the schedule matters less than the mechanic. A perfect schedule attached to an unperformable transfer obligation is decoration.

Leavers and the price of leaving

Define the leaver categories exhaustively. A good leaver — death, incapacity, removal without cause — typically keeps vested shares and transfers unvested shares at fair value or a formula price. A bad leaver — resignation before the cliff, dismissal for cause, breach of restrictive covenants — typically transfers some or all shares at face value or a discount. The drafting traps are the definitions: "cause" needs a list, not an adjective, and the valuation formula needs to be computable by an accountant without a second dispute. If fair value is to be determined by an independent valuer, name how the valuer is appointed and who pays.

Remember that every leaver transfer is a share transfer with formalities: a proper instrument of transfer, stamp duty under the applicable provincial stamp regime, board approval of registration under the articles, and entry in the register of members. A leaver clause that ignores these steps produces a right without a working remedy.

Restraints that hold and restraints that do not

Founders routinely ask for aggressive non-competes, and Pakistani law routinely declines to give them. Section 27 of the Contract Act, 1872 renders agreements in restraint of trade void, with narrow statutory exceptions, and courts have applied it firmly to post-termination restraints on individuals [CURRENT CASE LAW ON FOUNDER AND EMPLOYEE RESTRAINTS — TO BE VERIFIED BY REVIEWING LAWYER]. The practical drafting response is layered: restraints that operate while a founder remains a shareholder or director are more defensible than restraints on someone who has fully exited; non-solicitation of employees and customers fares better than a bar on working; and the protections that reliably survive — confidentiality obligations and completed IP assignment — should carry the real weight. A founder who leaves owning no IP, bound by confidentiality, and stripped of the customer list is well contained even where the non-compete itself would fail.

Execution, stamping, and the articles

Three formalities decide whether the agreement performs under pressure. Stamp it: agreements attract stamp duty under the provincial stamp laws — in Punjab through the e-stamping system — and an unstamped document faces admissibility objections at the precise moment you need it in evidence. Sign it properly: electronic execution is generally recognised under the Electronic Transactions Ordinance, 2002, subject to prescribed exceptions [SCOPE — TO BE VERIFIED BY REVIEWING LAWYER], though wet-ink originals remain the conservative choice for a document this important. And align the articles: pass the special resolution, file the amended articles, and check clause by clause that the two documents agree, because a contradiction hands the future dispute a preliminary issue before it reaches the merits.

When to sign and when to reopen

Sign at or before incorporation, while the company is worthless and the founders are friends — both conditions make negotiation honest. Reopen the agreement at defined events rather than by drift: the first external investment, when the investor's shareholders' agreement will supersede or absorb much of it; any founder departure; any material change in roles; and any restructuring, including a flip to a foreign holding company, which moves the shareholder relationship into a different legal system and requires the vesting and leaver mechanics to be rebuilt there. An agreement last read at incorporation is usually wrong within two years — the point is not that it must be perfect, but that it must be current.