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

What is the default rule on who owns code?

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 in the absence of agreement to the contrary. Computer programmes are literary works under Section 2(o), so this is the rule that governs your code.

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.

Section 17(b) does give first ownership to the person who commissions certain works for valuable consideration, but it is limited to photographs, paintings, portraits, engravings and cinematograph films. Commissioned software is not on that list. Founders familiar with the American "work made for hire" idea are often surprised that there is no equivalent general rule for contractors in India.

Who owns code written before the company was incorporated?

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, or with you and your co-founders jointly if you wrote it together.

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 usually 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 a signed assignment specifying the rights, the duration and the territory.

Agencies add a further layer. The agency may itself have used freelancers, so its ability to assign depends on whether it took assignments from them. Agencies also commonly reuse their own libraries and frameworks across clients and will not assign those. A sensible contract assigns the bespoke code and grants a perpetual, irrevocable licence to the agency's pre-existing components.

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. Consider a seed round of ₹3 crore. Diligence shows that the payments module was written in 2023 by a consultant who has since left on bad terms. The consultant knows the round cannot close without a signed assignment and asks for ₹15 lakh to sign. The cost of fixing this early would have been a two-page document and a modest fee. The cost of fixing it under deal pressure is whatever the person holding the missing signature decides to ask for, and occasionally the deal does not survive it.

How do you fix an ownership gap?

Work through the gaps in this order. First, founders: each founder signs an assignment deed to the company covering all work on the product before incorporation, with a schedule describing the repositories, designs and domain names involved. Second, current contractors and agencies: amend their contracts or sign standalone assignments. Third, former contributors: approach them early, politely, with a short confirmatory assignment and a reasonable fee if needed. Fourth, employees: check that every appointment letter contains an IP clause, and take confirmatory assignments from senior engineers who joined before letters were standardised.

Each assignment should be in writing and signed, identify the work, and state the rights, the duration (normally the full term of copyright) and the territory (normally worldwide). If it says nothing about duration, Section 19(5) deems it to be five years; if it says nothing about territory, Section 19(6) presumes India.

An assignment deed is also an instrument that attracts stamp duty, at rates set under the Indian Stamp Act, 1899 as it applies in your State or under the State's own stamp law. An inadequately stamped document can face admissibility problems in evidence under Section 35 of the Indian Stamp Act, 1899 or the equivalent State provision, so stamp it properly when you sign. Keep the signed and stamped originals with the company's statutory records, because diligence teams will ask to see them rather than scanned copies of unsigned drafts.

What should a founder assignment deed say?

A founder assignment does not need to be long, but it needs to be specific. A workable core clause reads along these lines:

"The Founder hereby assigns to the Company, absolutely, all copyright and other intellectual property rights in the Works described in Schedule 1, including all rights to reproduce, adapt, publish, communicate to the public, license and commercially exploit the Works, for the full term of copyright and throughout the world. The Founder shall sign any further documents reasonably required to record or perfect this assignment."

Schedule 1 should name the repositories, the date range of commits, design files, documentation and any domain names or social media handles registered in the founder's personal name. State the consideration, even if nominal, and have the company accept the assignment by a board resolution. If a founder has also filed or intends to file a patent application, deal with that separately, because patent assignments follow the Patents Act, 1970 rather than the Copyright Act.

What about open source and third-party code?

Almost every product depends on open source libraries, and that is normally fine. The question in diligence is not whether you use open source but whether you comply with each licence. Permissive licences such as MIT and Apache generally require attribution and little else. Copyleft licences such as the GPL can require you to make your own source code available on the same terms if you distribute software that incorporates the licensed code.

Run a dependency scan, keep a list of licences used, and make sure copyleft components are either absent from distributed code or used in a way your advocate is comfortable with. Also check code snippets copied from public forums, templates bought from marketplaces, and fonts and images used in your app. Each comes with its own licence, and a buyer's counsel will ask.

The audit to run now

• List everything the product depends on: code, designs, brand assets, content, data and domain names.
• 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, especially copyleft licences that may require you to release your own source code.
• Keep a simple IP register with each document, so the next diligence takes days rather than weeks.