The Legal Blind Spot
One major issue with Indian startup law is the lack of automatic legal provisions in case of a founder’s death or incapacity. This results in the company having to deal with the crisis informally, leading to vulnerability and internal chaos due to the absence of the primary brand figure. Informal power shifts occur, decision-making is paralyzed, and investors become hesitant, causing operations to slow down. Eventually, there may be a share transfer to the founder’s legal heirs, but governance clarity is lacking.
Furthermore, a power struggle often unfolds among senior managers and key executives to assert control and fill the governance vacuum left by the founder’s absence. This shift of focus from the business to internal power dynamics negatively impacts the company’s operations and revenue streams.
The absence of a default legal response to a founder’s death or incapacity results in a governance vacuum, creating uncertainty.
Where the Law Falls Short
Existing laws governing the startup industry fail to address the governance vacuum and do not prompt viable decision-making within the company.
The Companies Act, 2013, the primary law on corporate governance in India, does not recognize a founder’s death or incapacity as a distinct governance event. This lack of provision for interim professional leadership during chaos leaves the Act falling short.
The Insolvency and Bankruptcy Code, 2016, only springs into action in case of financial default, not a leadership vacuum. The statutory default threshold of over Rs 1 Crore and the nature of startup funding prevent the IBC from addressing the immediate governance vacuum left by the founder.
Succession plans within startups are often managed through private contractual agreements under contract law, but this is more common in well-funded startups, leaving early-stage startups vulnerable.
Early-stage startups often overlook the need for a succession plan, leading to unpreparedness when founder absence occurs. The lack of a statutory obligation for a proper succession plan under the Act results in many startups relying on informal arrangements.
Only a few startups with experienced founders and legal advice address the risk through contractual mechanisms, while the rest depend on informal arrangements. However, contractual mechanisms cannot replace a default legal response to address the chaos from the founder’s absence.
