Nobody signs a term sheet expecting to end up in the NCLT. And yet here we are, watching what was once India’s most valuable startup, BYJU’S, collapse into insolvency proceedings with its founder preparing a $2.5 billion lawsuit against the very investors who backed him. Board members resigned. Auditors walked. Investors filed oppression and mismanagement petitions. And two investors told journalists they were not even sure how much of the company they owned.
That is the extreme version of what an investor dispute looks like. The more common version is quieter: a founder and an investor arguing about whether a milestone was met, a board seat being used to block a decision, or an anti-dilution clause being triggered in a way nobody anticipated when the SHA was signed.
Every startup relationship between a founder and an investor carries the structural conditions for a dispute. Different timelines, different risk appetites, different definitions of what the company should be doing. Understanding how these disputes start, how the law handles them, and what both sides can do before and during a conflict is not pessimism. It is basic operational awareness.
Why Disputes Start (and It Is Never Just One Thing)
The proximate cause of most investor-founder disputes is one of four things: governance overreach, information asymmetry, missed milestones, or exit timing disagreements. But the real cause is almost always the same: what was agreed in a term sheet was never translated clearly into an SHA, and both sides read the same clause differently for two years until it became unavoidable.
Governance overreach happens when an investor uses board rights, veto rights, or affirmative vote requirements to block decisions the founder believed were clearly within their remit. This is especially common in Indian startups where investors hold one of two or three board seats and interpret their role as more directive than advisory.
Information asymmetry becomes a dispute when investors start to feel they are not getting accurate or timely financial data. The BYJU’S situation saw all investor board representatives resign citing exactly this issue. When investors cannot access accurate data, they stop trusting the founder. When founders feel investors are using information requests as a mechanism for control, they stop sharing freely. The spiral is fast.
Missed milestones are the most contractually clear trigger. Many funding rounds come with milestone-linked tranches or protective provisions that activate if specific targets are not met. Founders often underestimate how binding these clauses are. Investors, especially institutional ones, enforce them.
Exit timing is where late-stage disagreements typically crystallise. Founders want more time to build. Investors have fund lifecycles and LP commitments. Drag-along rights, put options, and liquidation preferences all become live instruments when the gap between what a founder wants to do and what an investor needs to achieve becomes too wide.
The SHA Is the Battlefield
Before a dispute becomes a legal proceeding, it is always a contract interpretation problem. The Shareholders’ Agreement is the document that governs the investor-founder relationship, and most disputes come down to what it actually says versus what both parties assumed it meant.
The clauses that create the most friction in Indian startups are predictable.
Liquidation preferences determine who gets paid first in an exit. A 1x non-participating preference, where the investor gets their money back first and then exits, is standard. A 2x participating preference, where the investor gets 2x their investment before sharing in the remaining proceeds with founders, is aggressive. Many early-stage Indian founders sign these without fully modelling what happens in a flat or moderate exit. By the time the acquisition offer arrives, the preference stack leaves the founders with almost nothing.
Anti-dilution provisions protect investors from losing percentage ownership in a down round. Broad-based weighted average anti-dilution is market standard in India. Full ratchet anti-dilution, which adjusts the investor’s effective price to match the new lower price entirely, is punishing for founders and has been a point of serious conflict in several Indian deals.
Affirmative vote rights give investors the power to block specific decisions without holding a majority. Hiring and firing of key management, new fundraising, issuing ESOPs, taking on debt above a threshold, entering new business lines, these are all commonly listed. When used judiciously, they are reasonable investor protection. When used to stall business decisions, they are a governance weapon.
Drag-along rights allow a majority shareholder to force minority shareholders to participate in a sale. For investors, this is an exit mechanism. For founders, if the drag threshold is set low, it is a clause that can force them to sell a company they do not want to sell.
The founders who understand these clauses before they sign are far better positioned when a dispute arises. The founders who read them for the first time during a conflict are starting from behind.
Resolution Mechanisms: What the Law Actually Provides
Indian law provides three main routes for resolving investor disputes, and knowing which one applies to your situation matters as much as knowing the substance of your grievance.
The first is arbitration under the Arbitration and Conciliation Act, 1996. Most well-drafted SHAs include an arbitration clause specifying the seat, the rules (typically SIAC, ICC, or the Indian Arbitration Council), and the governing law. Arbitration is faster than litigation, confidential, and binding. In September 2025, the Delhi High Court upheld a buyout remedy ordered by an arbitral tribunal in a shareholder deadlock case, affirming that arbitrators can grant robust remedies including forced share transfers when the SHA provides for it. This was a significant development: it confirmed that contractual dispute resolution mechanisms will be enforced by Indian courts when the SHA is properly drafted and the company is itself a party to the agreement.
The caveat is that arbitration works best for contractual disputes. If a party frames the dispute as oppression or mismanagement, those claims fall under Sections 241 and 242 of the Companies Act, 2013, which are the exclusive domain of the NCLT. No arbitration clause in an SHA can strip the NCLT of that jurisdiction. The Bombay High Court has held clearly that a genuine oppression petition cannot be referred to arbitration simply because an SHA contains an arbitration clause.
The second route is the NCLT itself. A petition under Section 241 can be filed if a shareholder believes the company’s affairs are being conducted in a manner prejudicial to the company or its members. The NCLT can order a wide range of reliefs: removal of a director, buyout of minority shares, appointment of an administrator, or restructuring of the board. NCLT proceedings are slower than arbitration, are public record, and carry reputational consequences for both sides. BYJU’S investors used this route when they filed an oppression and mismanagement petition in Bengaluru in February 2024 to block a rights issue that would have diluted their stakes.
The third route is mediation. The 2023 Mediation Act brought structured mediation into the mainstream of Indian commercial dispute resolution. For investor-founder disputes that have not yet escalated to litigation, mediation with a neutral mediator is often the fastest and most commercially sensible path. It preserves the relationship if both parties want to continue working together, and it avoids the cost and exposure of formal proceedings.
| Route | Best For | Timeline | Public Record | Outcome |
| Arbitration (SHA clause) | Contractual breaches, deadlock | 6 to 18 months | No | Binding award |
| NCLT (Sec 241/242) | Oppression, mismanagement | 12 to 36 months | Yes | Court-ordered relief |
| Mediation | Early-stage disagreements | 1 to 3 months | No | Negotiated settlement |
| Direct negotiation | Any stage, before escalation | Days to weeks | No | Settlement or standstill |
What Founders Should Do Before a Dispute Escalates
The single most important thing a founder can do is not wait for a dispute to formalise. Once a petition is filed or an arbitration notice is issued, the legal costs begin, the relationship is likely irreparable, and the business takes the collateral damage.
The first step is to read your SHA carefully, right now, not when you are in conflict. Understand your affirmative vote thresholds, your milestone obligations, and what your drag-along clause actually says. If you signed documents three years ago and cannot remember the details, get your legal counsel to prepare a clause-by-clause summary.
The second step is to maintain disciplined information sharing. Founders who stop communicating with investors when business gets hard create the conditions for a governance dispute. Send your monthly investor updates. Be honest about underperformance. Investors who receive transparent communication from founders are significantly less likely to reach for legal mechanisms when numbers disappoint.
The third step, if a dispute is starting to form, is to initiate private negotiation before positions harden. Many investor-founder conflicts that end up in arbitration could have been resolved with a renegotiated milestone, an adjusted board seat structure, or a secondary transaction that gave the investor partial liquidity. Once lawyers are formally involved, the incentive to settle narrows and the cost of resolution rises sharply.
The fourth step is to understand your rights. Indian law does not leave founders without recourse. Investors who withhold committed tranches can be sued for breach of contract. Investors who use their board representation to obstruct legitimate business decisions can face governance challenge. Investors who attempt to dilute founders through improper rights issues face NCLT scrutiny. Founders often underestimate how many tools they have.
What Investors Should Do Before a Dispute Escalates
Investors in Indian startups, particularly angels and early-stage VCs, frequently underinvest in post-investment governance. The relationship after the cheque is signed receives a fraction of the attention that went into due diligence and deal structuring. This is where conflicts incubate.
The most effective investor practice is to define what “active governance” means before it is needed. How often do you expect board meetings? What information rights will you actually use? What triggers a conversation about management changes? Investors who have these conversations with founders at the term sheet stage, and build them into the SHA, encounter far fewer surprises eighteen months later.
When a conflict is forming, the worst investor move is to immediately invoke legal clauses without attempting a direct conversation. The BYJU’S situation escalated as quickly as it did partly because institutional investors moved to formal positions, board resignations and oppression petitions, before a negotiated restructuring was fully explored. Whatever the substantive merits, the speed of legal escalation destroyed any residual possibility of a collaborative resolution.
The investor who documents everything, communicates expectations clearly, and responds to governance concerns early creates a far better outcome, even in difficult situations, than the one who reaches for contractual weapons at the first sign of trouble.
The Global Reference Point
In the US, the standard approach to investor-founder disputes runs through Delaware courts, where startup governance is well understood and case law is extensive. Indian startups that flip to Delaware or Singapore holding structures, which many do ahead of US investor rounds or IPO planning, often end up with multi-jurisdiction disputes. The BYJU’S situation played out simultaneously in Indian NCLT proceedings, US Chapter 11 bankruptcy proceedings, and Delaware contempt hearings. That level of legal complexity costs crores in fees and years in resolution time.
The lesson is that jurisdiction matters enormously when drafting the SHA. The seat of arbitration, the governing law, and the enforcement mechanism need to be chosen deliberately, not defaulted to because a template said Singapore. For purely domestic Indian rounds, Indian arbitration with a Mumbai or Delhi seat is faster to enforce. For rounds with foreign investors, Singapore (SIAC) remains the most common choice, and Indian courts have generally shown willingness to enforce SIAC awards in commercial disputes.
The Take Nobody Will Say Out Loud
Most investor disputes are not about governance or legal rights. They are about the founder and the investor realising, too late, that they had fundamentally different expectations about what the other party was supposed to do.
The investor thought they were buying a certain kind of founder. The founder thought they were getting a certain kind of partner. Neither of them said this clearly before the SHA was signed. And now, two years in, the SHA is the only language they share.
The founders and investors who avoid this outcome are not the ones with the best lawyers. They are the ones who had the uncomfortable conversation early: what does winning look like for you, specifically, and in what timeframe? What happens if we disagree about strategy at Series B? What is your actual tolerance for a flat year?
Those conversations feel unnecessary when the relationship is new and optimism is high. They feel priceless when the relationship is strained and the lawyers are circling.
Frequently Asked Questions
What is the first thing a founder should do when an investor dispute begins? Before anything else, read your SHA and understand exactly which clauses are in play. Then initiate a direct conversation with the investor before either side takes a formal position. Most disputes that could be resolved through renegotiation or mediation escalate because one party moved to legal action before the other was ready to engage. Document all communications from this point forward.
Can investors force a founder out of their own startup in India? Yes, under certain conditions. If investors hold enough board votes or shareholder votes to pass an ordinary or special resolution, they can remove a director. They can also petition the NCLT under Section 241 for oppression or mismanagement relief, which can include management restructuring. What they cannot do easily is strip a founder of shares without a contractual mechanism, such as a vesting schedule with bad leaver provisions, or an NCLT order following formal proceedings.
Is arbitration or the NCLT better for resolving an investor dispute? It depends on what the dispute is about. Contractual breaches, missed milestones, deadlocks governed by the SHA, these are best resolved through arbitration when the SHA has a valid arbitration clause. Claims of oppression and mismanagement, which involve the company’s affairs being conducted prejudicially, fall under the exclusive jurisdiction of the NCLT. A 2025 Delhi High Court judgment confirmed that arbitral tribunals can order buyouts in deadlock situations when the SHA provides for it, making arbitration more powerful than many founders previously assumed.
What clauses in a term sheet create the most risk for founders in a dispute? Liquidation preferences above 1x non-participating, broad affirmative vote rights that cover day-to-day operational decisions, low drag-along thresholds that allow an investor to force a sale, and full ratchet anti-dilution provisions. Founders should model the financial and control implications of each of these before signing, not after.
How does an investor dispute affect the ability to raise a future round? Significantly. Any pending litigation, NCLT petition, or unresolved equity dispute on the cap table will appear in due diligence and most institutional investors will not proceed to term sheet until the matter is resolved or formally ring-fenced with a legal opinion. The reputational signal of a public dispute, especially one that surfaces in the press, can affect future investor relationships well beyond the specific funding round in question.
Can an investor be held liable for withholding committed funds? Yes. If an investor has committed capital in a signed SHA or investment agreement and fails to transfer it without a valid contractual basis, the company can pursue a breach of contract claim. This is a less common dispute but it does occur, particularly with smaller angels and syndicates where the commitment and the transfer happen at different times.
What is the role of mediation in startup investor disputes? India’s Mediation Act 2023 formally recognised mediation as a structured resolution mechanism for commercial disputes. In investor-founder conflicts that have not yet escalated to formal proceedings, mediation with a neutral third party is the fastest and most cost-effective option. It is also the only mechanism that has a realistic chance of preserving the working relationship. Once arbitration or NCLT proceedings begin, the relationship is almost always over regardless of the outcome.
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