Key facts
- Venture capital firms are increasingly enforcing tougher contractual terms on startups.
- Founders removed for financial irregularities may now forfeit even vested shares.
- A study by Boolean Legal found 76% of Indian private companies that raised VC in 2025 imposed 'Nuclear Option' clauses.
- These clauses allow for the loss of both vested and unvested shares at face value or cost.
- Recent governance issues at startups like Byju's and BharatPe have driven this trend.
Venture capital firms are increasingly implementing stricter contractual terms for founders, particularly concerning the forfeiture of shares in cases of misconduct. A recent study by law firm Boolean Legal revealed that nearly 76% of Indian private companies that secured venture capital funding in 2025 included clauses allowing for the loss of both vested and unvested shares at face value or cost if a founder is removed for cause, such as financial irregularities.
This shift in contract terms is a direct response to a series of high-profile governance failures at startups like Byju's, BharatPe, GoMechanic, Trell, and Mojocare. These incidents, involving alleged financial reporting issues and boardroom disputes, have prompted investors to scrutinize founder conduct more closely. Historically, vested shares, which founders earn over time, were considered 'earned' and generally retained upon departure. However, the current trend, as highlighted by the BharatPe-Ashneer Grover dispute, shows a move towards allowing investors to claw back even these earned shares in cases of serious misconduct.
Lawyers and early-stage investors confirm this trend, noting that such clauses serve as an economic deterrent against fraudulent activities, fund diversion, self-dealing, or deliberate misreporting. While the clauses are contractually present in many agreements, their enforcement can be hesitant, especially when removing a founder might significantly harm the company. Corporate-backed ventures and family offices are noted as being more inclined to enforce these rights. Founders are now negotiating for more precise language, aiming to ensure that removal and forfeiture are tied to proven fraud or cause, rather than mere allegations or routine disagreements, and pushing for fair value if vested shares are repurchased outside of severe misconduct scenarios.