Two documents protect your startup before it ever raises money: a founder vesting arrangement and a founder IP assignment. Vesting stops a co-founder who leaves in month three from walking away with a third of the company. IP assignment makes sure the code, brand, and designs you built actually belong to the company and not to you personally. Investors check both in the very first round of due diligence, so put them in place the moment you incorporate. This lesson shows you how.
Why founder vesting matters
When you incorporate through SPICe+ on the MCA portal, shares are allotted to each founder immediately and in full. Nothing legally ties those shares to continued work. If one founder quits early, the remaining team is left doing all the work while the departed founder keeps their entire stake. Vesting fixes this by making founders earn their equity over time.
The 4-year schedule with a 1-year cliff
The market standard in India, and globally, is a four-year vesting period with a one-year cliff. It works like this:
- The cliff: nothing vests for the first 12 months. If a founder leaves before completing one year, they take zero equity.
- The one-year mark: 25 percent vests in one go, rewarding the founder for crossing the cliff.
- The remaining three years: the other 75 percent vests in equal instalments, usually monthly or quarterly, until the founder is fully vested at 48 months.
How this is structured in India: reverse vesting
Because shares are already issued at incorporation, Indian startups use reverse vesting. Founders hold all their shares upfront, but the company or the co-founders get a contractual right to buy back the unvested portion at a nominal price, typically the face value of the share, if the founder leaves early. This transfer right, rather than a formal capital-reduction buyback, is what makes vesting enforceable.
Good leaver and bad leaver
Well-drafted clauses distinguish between two exits. A good leaver (for example, someone leaving due to genuine ill health) keeps everything vested to date. A bad leaver (leaving to join a competitor, or removed for cause) may forfeit unvested shares and sometimes faces tougher terms. Define these categories clearly so there is no dispute later.
Where to write it down
Vesting lives in the Founders' Agreement from day one, and is later mirrored and strengthened in the Shareholders' Agreement (SHA) once an investor comes in. Agree vesting between co-founders early. It is far harder to introduce once someone already feels fully entitled to their shares.
Assigning founder IP from day one
Here is a trap many first-time founders miss. Anything you build before the company exists, such as the prototype, the logo, or the initial codebase, belongs to you personally, not the company. Section 17 of the Copyright Act, 1957 gives an employer ownership of work made in the course of employment, but pre-incorporation work was never made under employment, so it stays with the founder until formally transferred. India also has no automatic "work made for hire" rule that fixes this for you.
What Indian law requires
- Copyright: Section 19 of the Copyright Act requires an assignment to be in writing and signed by the assignor, identifying the work, the rights, the duration, and the territory. Watch the defaults: if you do not state territory, it is presumed to be India only; if you do not state duration, it is deemed just five years. So your assignment must expressly say worldwide and for the full term of the copyright.
- Patents: under the Patents Act, 1970 the inventor is the first owner and there is no automatic assignment. Any transfer must be in writing.
- Trademarks: assignments of a mark must also be recorded in writing.
The practical fix is a Founder IP Assignment Agreement (also called a deed of assignment) signed by each founder in favour of the company, executed on stamp paper of the value prescribed by your state Stamp Act, and accepted by the company right after incorporation. It should assign all existing and future work product, source code, designs, and brand assets, worldwide and perpetually, and include a moral-rights waiver. Do this on day one, keep the signed deed in your data room, and you will pass IP due diligence without a scramble.