Your Startup May Not Own Its Own Code. Here Is Why

The default rule

Section 17 of the Copyright Act, 1957 provides that the author is the first owner of copyright, subject to exceptions. Clause (c) covers work made in the course of employment under a contract of service, where the employer is first owner absent agreement to the contrary.

Everything turns on that phrase. Work made by an employee, in their role, belongs to the employer by default. Work made by someone who is not an employee does not, and no amount of paying an invoice changes that by itself. Payment buys the deliverable; it does not automatically transfer the copyright.

The pre-incorporation gap

This is the one that catches founders most often. You build a prototype for eight months, then incorporate. During those eight months there was no company, so there was no employment relationship, so Section 17(c) had nothing to operate on. The copyright in that work sits with you personally.

That is fine while you are the only shareholder and nobody is asking. It stops being fine when the company raises money on the strength of a product it does not own, or when a co-founder who wrote part of the early code leaves. The fix is an assignment from the founders to the company, executed after incorporation, and it needs to be a real document rather than an assumption.

Contractors, agencies and interns

The second cluster of gaps involves everyone who built something for you without being on payroll. A development agency that delivered your first app, a freelance designer who produced the brand, an intern who wrote a module over a summer, a fractional CTO engaged on a consultancy basis. In each case the person or entity is not an employee, so the default first ownership does not sit with the company.

Standard services contracts frequently say the client owns the deliverables, and that helps, but the assignment still has to meet the formal requirements of Section 19, which many short-form agreements do not. An invoice with a line saying "full rights transferred" is not the same as an assignment specifying the rights, the term and the territory.

Why it surfaces at diligence

An investor or acquirer is buying, among other things, the intellectual property. Their counsel will ask for the chain of title: who created what, and what document moved it to the company. Where the answer is that the founders built it before incorporation and nothing was ever signed, that becomes a closing condition.

Closing conditions are expensive when they require cooperation from someone who has since left, fallen out with the team, or moved abroad. The cost of fixing this early is a few documents. The cost of fixing it under deal pressure is considerably higher, and occasionally the deal does not survive it.

The audit to run now

• List everything the product depends on: code, designs, brand assets, content, data.
• For each, identify who actually created it and in what capacity at the time.
• For founders, check whether an assignment to the company was executed after incorporation.
• For contractors and agencies, check whether the contract contains an assignment meeting the Section 19 requirements, not just a statement of ownership.
• For interns and short engagements, check whether anything was signed at all.
• For open source components, check the licence terms actually permit your use.