Module 4 of 6 — Founders' Agreements and Startup Legal Setup

IP Assignment: Who Owns What the Founders Built

Reading module · approx 13 min

One of the most common and most serious legal problems at the Series A stage is the discovery that the company does not actually own the IP it has been building. The founders built it, but they never formally assigned it to the company. Investors cannot invest in a company that does not own its core technology.

The IP ownership problem in Indian startups

Under the Indian Copyright Act, 1957, works created by employees in the course of their employment vest in the employer by default. But for founders of a startup, the situation is more complex:

Work created by a founder before incorporation belongs to the founder personally, not to the as-yet-unincorporated company
Work created by a founder after incorporation, during a period when the founder was also employed elsewhere, may belong to the other employer if the founder was using that employer's resources or time
Work created by a founder after incorporation, while the founder was already a director and shareholder but technically had no employment agreement with the company, may not vest in the company under the Section 17 default rule (which applies to employees, not directors who are not also employees)

The solution: a comprehensive IP assignment agreement

The founders' agreement, or a separate IP assignment agreement executed at incorporation, should:

Assign to the company all IP created by each founder, from the time they began working on the venture to the date of the agreement (and continuing for IP created thereafter)
Cover all categories of IP: copyright (including software code), trade secrets, inventions (whether patentable or not), trademarks, domain names, and any other proprietary information
Include a specific assignment of "background IP" — IP that existed before incorporation but is being used in or is essential to the company's business
Require the founder to execute all further documents necessary to perfect the IP assignments (patent applications, trademark assignments, etc.)

Background IP: the trickiest category

Background IP is intellectual property that the founder developed independently before the company was formed but that is now being used in the company's product. Examples: code written before incorporation; a proprietary algorithm developed during a PhD; industry-specific know-how developed in a previous role.

Whether background IP should be fully assigned to the company or licensed depends on the nature of the IP:

If the background IP is the company's core product: it should be assigned outright to the company. Investors will not accept a licence because a licence can be revoked.
If the background IP is incidentally useful but not core: a royalty-free, perpetual, irrevocable licence may be acceptable.
If the background IP was developed using a previous employer's resources: the founder may not be able to assign it at all — it may belong to the previous employer. This must be investigated and disclosed before investors invest.

Moonlighting and IP ownership A founder who was employed at another company while building the startup faces a specific IP risk: employment contracts typically contain IP assignment clauses that vest all inventions and works created during employment in the employer, whether or not they are related to the job. If the founder built the startup's core technology during their employment at another company, that employer may own the IP. This is a deal-killer at the Series A. Founders should carefully review their prior employment contracts and obtain specific legal advice before assuming they can freely use code or concepts developed during previous employment.

Trademarks and domain names

The brand name and domain name of the startup are also IP that must be owned by the company. Common problem: the domain name is registered in a founder's personal name and the trademark application, if any, is in another founder's name. Before investors come in, the company must own the domain name and the trademark. Ensure that:

Domain names are registered in the company's name (or transferred from a founder's personal registration to the company's name)
Any trademark applications are filed in the company's name or transferred to the company
The company's social media handles are controlled by the company, not by individual founders

Module 5 covers ESOPs — the primary equity incentive tool for employees of Indian startups.