Incubation agreement: what to include, clause by clause

An incubation agreement is often signed in a hurry on the first morning of a programme. Its terms can outlast the programme by years, in the cap table and in the IP.

This guide explains the clauses an incubation agreement in India usually covers, and what the main schemes require. It is educational, not legal advice: both the incubator and the founder should have the final draft read by a lawyer.

What is an incubation agreement?

An incubation agreement is the contract between an incubator and a startup it admits. It records what the incubator provides, what the startup gives in return, who owns what, the milestones, how and when the startup leaves, how its data is used and how disputes are settled. Scheme-funded incubators are expected to have one with every startup.

AIM's Atal Incubation Centre guidelines say a centre should execute an appropriate incubation agreement with its incubatees, and that the residency period and exit policy may be defined in it. DST's NIDHI-TBI guidelines use the same words.

Which clauses does an incubation agreement cover?

Most incubation agreements cover eight areas: services, fees or equity, intellectual property, confidentiality, milestones, exit, data use and dispute resolution. Seed funding, where it applies, usually sits in a separate investment or grant agreement that refers back to the main one. The table lists each area and the point most often missed.

Clause	What it sets out	Often missed
Services	Space, labs, mentoring, legal and accounting help, investor access	What happens when a service is unavailable
Fees or equity	Rent, fees, stake, or a mix	When equity is issued and at what valuation
IP	Who owns what the startup creates, and any institute rights	Work made with the host's labs or staff
Confidentiality	What each side keeps private	Material shown to investors and mentors
Milestones	Dated goals and their evidence	What follows a missed milestone
Exit	Residency period, graduation, termination	What survives exit: stake, data, IP licences
Data use	What the incubator collects and reports	Naming the startup in funder reports
Disputes	Escalation, mediation, arbitration, governing law	Who decides, and where

What do Seed Fund Scheme rules say about the agreement?

The Seed Fund Scheme guidelines say the incubator shall execute a legal agreement with each selected startup before releasing the first instalment, with the terms and milestones clearly detailed. Later disbursements are linked to those milestones. The guidelines also fix several terms the agreement cannot override.

• No fees. The incubator and its staff cannot charge scheme applicants or beneficiaries any fee, in cash or in kind, for selection, disbursement, incubation or monitoring.
• Debt terms. Debt or debt-linked funding carries interest of no more than the prevailing repo rate, a tenure of no more than 60 months, a moratorium of up to 12 months, and no security or guarantee.
• Where money goes. Funds go into the startup's company bank account.
• Reporting. The startup sends a final report and an audited utilisation certificate at the end, with lessons and reasons if the venture failed.

AIM's seed support guidance adds that the agreement should be legally vetted, link releases to milestones, and define the terms of default in repayment clearly.

How should services, fees and equity be written?

List the services by name, say which are included and which are charged, and state any equity in exact terms: the percentage, the instrument, when it is issued and how it is valued. Vague promises of "support" in return for a fixed stake are the clause founders and later investors question most.

For incubators in higher education institutions, the MoE Innovation Cell's National Innovation and Startup Policy 2019 suggests a stake of 2% to 9.5%, and says that where equity is compulsory a startup may have a cooling period of three months on rental terms before deciding. Our post on how much equity incubators take covers the scheme rules in full.

Every term an incubator takes in the agreement is a term an investor will read in diligence.

What should the IP and confidentiality clauses say?

The IP clause should say that the startup owns what it creates, and spell out any exception, such as work made with substantial use of the host's labs or funds. Confidentiality should run both ways, and should cover what mentors, judges and visiting investors see. Ambiguity here is what holds up a funding round later.

Under the Copyright Act, 1957, the author is generally the first owner of a work, and an assignment is valid only in writing signed by the assignor. So founders' own work reaches the company only through signed assignments, a gap the guide on IP assignment for startups covers.

Host institutions add a layer. The 2019 policy says IP is jointly owned by inventors and the institute when institute facilities or funds are used substantially, and owned by inventors when they are not. Write down which applies to each startup at entry.

How should milestones, exit and data use be handled?

Put milestones in a schedule attached to the agreement, with dates and evidence. Define exit by residency period, graduation and termination events, and say what survives exit. Then say what data the incubator collects, what it reports to funders and whether it may name the startup, because scheme reporting requires much of this data.

Reporting is not optional for scheme incubators. The Seed Fund Scheme wants startup data on the Startup India portal in real time, and the NIDHI guidelines ask for a website listing incubatees. A data clause that covers this avoids a dispute when the startup's name appears in a report. How that data is gathered month by month is set out in how incubators track founder progress.

What should go in the dispute resolution clause?

A dispute clause should set an escalation path first, such as a meeting between the CEO and the founder, then mediation, and then arbitration or the courts, with the governing law and the seat or venue stated. Small incubators often skip this, until a disagreement over equity or exit leaves nobody sure who decides.

Before signing, a founder should check five things: what the incubator gets and when, what IP the company keeps, what happens after a missed milestone, what survives exit and who settles a dispute. Then take the draft to a lawyer. Once it is signed, the incubator onboarding checklist covers the rest of the first month.

Questions

What is an incubation agreement?

An incubation agreement is the contract between an incubator and a startup it admits. It sets out the services the incubator provides, any fee or equity in return, who owns IP, confidentiality, milestones, the residency period and exit, how data is used and reported, and how disputes are resolved.

Is an incubation agreement required under the Seed Fund Scheme?

Yes. The Startup India Seed Fund Scheme guidelines say the incubator shall execute a legal agreement with each selected startup before releasing the first instalment, with the terms and milestones clearly set out. Later disbursements are linked to the milestones in that agreement.

Can an incubator take equity in exchange for incubation?

Some do, and the terms vary. For incubators in higher education institutions, the National Innovation and Startup Policy 2019 suggests a stake of 2% to 9.5%, and says equity should not be forced on day one. Startups funded under the Seed Fund Scheme cannot be charged fees.

Should a startup get legal advice on an incubation agreement?

Yes. The agreement can affect the cap table, IP ownership and future fundraising, so both the founder and the incubator should have a lawyer review it. This guide is educational and explains common clauses; it is not legal advice.

Sources: DPIIT, Guidelines for Startup India Seed Fund Scheme · Atal Innovation Mission, NITI Aayog, Guidelines for Setting up of Atal Incubation Centres, Nov 2023 · DST, NIDHI Technology Business Incubator Guidelines and Proforma · MoE Innovation Cell, National Innovation and Startup Policy 2019 for Students and Faculty, Sep 2019 · Copyright Office, The Copyright Act, 1957, Chapter IV

For more on running an incubator in India, read the MyStartupValley blog or see MyStartupValley for incubators.