The Legacy Question: What Happens When A Startup Founder Passes Away?

India has spent years celebrating founders who built companies from scratch. But what rarely gets discussed is what happens to the company, its shares and the family when a founder is suddenly gone.

The recent tragic passings of prominent names in the Indian startup ecosystem, including Icertis’ Samir Bodas, Table Space’s Amit Banerji, Epigamia’s Rohan Mirchandani, Xpedize’s Regan Mithani and Whatfix’s Khadim Batti, have brought sharper focus on this question.

An untimely founder death can leave behind more than grief — it can create a complicated trail of questions around ownership, unvested shares, succession and the future of the business.

This is where estate and succession planning becomes critical. Putting the right provisions in place beforehand can help protect a founder’s family financially while giving the company a clearer path in their absence.

“From a family standpoint, a founder may have created significant wealth. But when institutional investors come in, the founder’s shares are often subject to vesting clauses. If those agreements are not clearly worded, the family may not be able to recover the founder’s full stake,” said the founder of digital estate planning startup Yellow, Nikhil Varghese. 

While planning for one’s demise could be uncomfortable for many, it is crucial to understand that estate and succession planning is important in several other situations. For instance, divorce, separation or disputes between cofounders can create questions around ownership and the division of assets. 

Therefore, this is less of a contingency plan and more of a governance issue that founders and investors need to address from the outset.

So, What Happens When A Founder Passes?

Preparation can only take one so far. Even with careful planning, what follows is hardly a speedy and straightforward process. 

“In the interim period, we have to give the family some time to adjust. Even if these principles are included in the documents, you can’t pick up the phone and say I’m going to enforce this right now. That’s not humane,” said Ashwini Thulsaram, a principal at 3one4 Capital, who leads the governance function for the VC firm. 

According to her, investors often assess whether a secondary transaction can be undertaken, while taking the preferences of the family or legal heirs into consideration. They also look at whether the legal heirs have the business acumen and the willingness to lead the company. 

“However, a secondary transaction is always a preference. This is because founders generally want to protect and create liquidity for their family,” she said, adding that a secondary could involve selling their stake to other investors at market value, at a certain discount, or at whatever price investors are willing to pay. 

These conversations could take 2-3 months. Generally, the immediate focus is to ensure that shares get bought at a certain price to ease the financial burden on the family, as per Thulsaram. More often than not, the company’s senior leadership team is prepared to step in and take over. 

How Can Founders Protect Their Legacy?

While investors assist, it is the founders who should ensure the terms of the shareholding agreement match their needs. 

“Founders are often most focused on raising funds during their first round of investment. But if these issues are not addressed in the first agreement, those terms become the foundation for future rounds. It can then be much harder to negotiate better terms later,” Varghese cautioned. 

Understanding the vesting schedule and negotiating favourable terms requires the founder to have the right advisors. 

“Making a will is the basic thing that everyone should do but, for most startup founders, they should consider trusts to ringfence their liabilities,” Varghese added. 

A trust is a legal entity that holds assets on behalf of a beneficiary. It is a critical aspect of estate planning, especially when it comes to businesses, said Sandeep Nerlekar, founder of Terentia Consultants, an advisory firm that helps individuals, families, and businesses with their estate and succession planning. 

“Founders can hold wealth in different forms, including preference shares, CCPS, OCDs, NCDs and DVR shares. These assets can be transferred to a trust, creating a separate pool of assets and helping diversify the risk,” Nerlekar said. 

“This basically separates ownership from benefits. Then if liabilities come your way, they sit on your personal balance sheet and do not percolate into the assets held by the trust,” Varghese explained. 

Jurisdiction also becomes a major factor as Indian startups continue to attract capital from around the world. While India does not have any tax on inheritance or estate tax that applies to properties transferred on death, this is not true for the rest of the world.

How Can Investors Prepare For The Worst

Drawing from his experience, Bluegreen Ventures’ founding partner Anup Jain said investors are often left to manage their own crisis when a founder dies unexpectedly.

This can involve supporting the founder’s family, helping the remaining founding team reach an agreement, and finding a suitable replacement with the right equity arrangement. 

“Life is uncertain. We plan to include succession planning provisions in all our deals going forward, because these concerns are not age-related. There are examples showing that tragedies can happen at any time,” Jain said. 

VCs also play an active role from the early stages of funding, ensuring that founders plan for potential risks and the future, said Thulsaram. 

When investors come on board, founders are generally subject to a vesting schedule wherein their equity unlocks at different stages after specified periods of time, similar to how ESOPs work. This helps keep founders aligned with investors while ensuring the company has greater stability if a founder exits.

Exigency clauses are generally included by institutional investors when they participate in a deal. In case of a founder’s untimely passing, the term sheet might include provisions enabling the family to immediately unlock unvested equity, or allowing direct transmission of shares to nominees while bypassing the approval of other investors. 

“The terms for each situation vary by investor in terms of whether the family or a legal heir gets all the shares vested or only a proportion, or how many months get accelerated,” Thulsaram added. 

For India’s startup ecosystem, recent tragedies have shown why estate and succession planning can no longer be an afterthought. As startups grow larger and founder wealth becomes increasingly tied to company equity, planning for what happens next has to become an essential part of protecting both the founder and the business.

[Edited by Akshit Pushkarna and Shishir Parasher]

The post The Legacy Question: What Happens When A Startup Founder Passes Away? appeared first on Inc42 Media.