Founder agreements: vesting, IP assignment, non-solicit—mistakes that trigger litigation and how to avoid them

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Founder agreements: vesting, IP assignment, non-solicit—mistakes that trigger litigation and how to avoid them

Table of Contents

A founder agreements in 2025, focused on the three clauses that most often trigger litigation—vesting, IP assignment, and non‑solicit—plus a checklist of mistakes to avoid, model clauses, and practical calculators founders can use before signing a term sheet or splitting equity.

The short answer founders need

  • Always implement reverse vesting with a 1‑year cliff and 3–4‑year schedule; dead equity is a top funding killer and a common litigation trigger when a co‑founder exits early.
  • Execute airtight IP assignment and confidentiality from day zero (including past work and side contributors); in India, contractors own what they create absent written assignment.
  • Use non‑solicit instead of post‑employment non‑compete; Indian courts routinely strike down non‑competes under Section 27 ICA, while reasonable non‑solicits and confidentiality obligations remain enforceable.

Why founder agreements go to court

Typical triggers include an early leaver holding unvested stock, missing invention assignments for code/designs, and overbroad restraints that are void but still weaponized in disputes; each can stall fundraising or M&A and force expensive settlements.

Vesting: the guardrail against dead equity

What investors expect

  • Standard: 4‑year vesting with 1‑year cliff; monthly or quarterly thereafter; double‑trigger acceleration on sale+termination for a portion (e.g., 25–50%).
  • Reverse vesting for founders: shares are issued up‑front, but the company can repurchase unvested shares at cost if the founder leaves before vesting.

Common mistakes that spark disputes

  • No vesting or merely a handshake promise; leads to “dead equity” and investor red flags.
  • No repurchase right language or unclear “cause/good reason” definitions; results in inconsistent outcomes on exit or firing.
  • No cliff; short‑tenure founders walk away with a chunk of equity.

Model vesting clause (reverse vesting)
“Founder’s [X] shares are subject to reverse vesting over 48 months from the Vesting Start Date, with a 12‑month cliff (25% on month 12) and monthly vesting thereafter. Upon Founder’s termination for any reason, the Company may repurchase all unvested shares at the lower of cost or face value within 90 days. In a Change‑of‑Control followed within 12 months by termination without Cause or resignation for Good Reason, [25–50]% of then‑unvested shares shall accelerate.”

Vesting calculator (quick use)

  • Input: total founder equity; months served; schedule 48 months with 12‑month cliff; monthly accrual post‑cliff. Output: vested vs unvested today; company repurchase quantity at cost.

IP assignment: own what matters before it’s valuable

India‑specific rule of thumb

  • Employer owns employee‑created works made in the course of employment, but contractors/freelancers own their output unless a written assignment transfers it. Oral assurances don’t fix chain‑of‑title.
  • Assignment should cover past contributions, moral rights waivers where permissible, and deliverables from advisors/friends who contributed early.

Frequent IP mistakes that trigger litigation or diligence holds

  • Missing assignment from ex‑cofounder or early freelancer; later demands disrupt funding or acquisition.
  • No present‑tense assignment (“hereby assigns”)—only a promise to assign, which courts may treat as incomplete.
  • Employer‑conflict trap: founder used prior employer’s laptop/time or overlapping field; employer asserts ownership.

Model IP assignment (founder)
“Founder hereby irrevocably assigns to the Company all right, title, and interest, worldwide, in and to any and all inventions, software, source code, algorithms, data, designs, works of authorship, improvements, and other intellectual property created, conceived, reduced to practice, or developed by Founder, solely or jointly, (i) before the date hereof and related to the Company’s business (as identified in Annex A) and (ii) during Founder’s engagement with the Company, whether or not during working hours or on Company premises or equipment. To the extent any moral rights subsist, Founder waives and agrees not to assert them to the extent permitted by law. Founder shall execute further documents to perfect the Company’s title. This assignment is a present assignment effective upon creation.

Contractor assignment flag (use a separate IA/NDA)

  • For every non‑employee contributor, execute an Invention Assignment + IP transfer before work starts; pay consideration and define deliverables clearly.

Chain‑of‑title checklist

  • Signed founder IPAs; employee IPAs; contractor IA/NDA with assignment; repository access logs; third‑party license ledger (open‑source notice.

Non‑solicit vs non‑compete: what actually holds up in India

Court posture in 2025

  • Post‑employment non‑compete is generally void under Section 27 ICA (with limited sale‑of‑goodwill exceptions). Courts repeatedly strike post‑termination non‑competes; do not rely on them.
  • Non‑solicitation (employees/customers) and confidentiality/trade secret clauses are more enforceable when reasonable in scope and duration.

Litigation‑trigger mistakes

  • Trying to enforce a broad non‑compete; generates injunction fights founders often lose.
  • Non‑solicit with vague verbs like “deal with” or no geographic/time limits.
  • Using employment‑style restrictions in founders’ documents without tailoring to shareholding and fiduciary duties.

Model non‑solicit (balanced)
“For a period of 12–24 months following termination, Founder shall not, directly or indirectly, solicit for employment any employee of the Company with whom Founder had material interactions in the 12 months prior to termination, nor solicit any paying customer of the Company with whom Founder had substantive business contact in the 12 months prior to termination with the intention of diverting business for a competing product or service. General job advertisements and responses thereto are not solicitation.”

Confidentiality backbone (survives termination)
“Founder shall not disclose or use, except for Company’s benefit, any Confidential Information (including source code, roadmaps, pricing, customer lists, and trade secrets). This obligation survives termination indefinitely as to trade secrets and for [3–5] years as to other Confidential Information.”

The founder agreement pack: what to include in 2025

Core documents

  • Founder Agreement/Shareholders’ Agreement: equity split, vesting/reverse vesting, roles, decision rights, dispute resolution.
  • IP Assignment + Confidentiality (Founder/Employee/Contractor forms).
  • Non‑solicit/No‑poach; no post‑employment non‑compete.
  • Founder exit mechanics: good leaver/bad leaver, valuation method for buyback, drag/tag alignment with future investors.

Good leaver/bad leaver matrix (simplified)

  • Good leaver: termination without cause, death/disability; company repurchases only unvested shares at cost; vested at FMV or pre‑agreed formula.
  • Bad leaver: fraud/gross misconduct; company repurchases unvested at cost and may repurchase vested at cost or discount subject to law and investor consents.

Board/decision rights

  • Define reserved matters (IP sale, new share issue, debt > threshold), quorum including at least one founder, and tie‑breakers/mediation.

Red‑flag scenarios (with fixes)

  • 50/50 stalemate with no casting vote or mediation clause → add chair casting vote or neutral advisor mediation/arbitration.
  • Early code by ex‑friend without assignment → procure retro assignment with consideration; otherwise re‑write code segment to clear title.
  • Founder moonlighting at competing employer → review prior contracts; seek waiver; segregate IP; consider gardening leave before full‑time switch.
  • Overbroad non‑compete → replace with focused non‑solicit + confidentiality + IP enforcement.

Dispute resolution that protects runway

  • Multi‑step: negotiation → mediation → arbitration (seat: Bengaluru/Mumbai/Delhi; sole arbitrator for speed).
  • Interim relief carve‑out for IP/confidentiality breaches to approach civil courts.

Model DR clause
“Any dispute arising under this Agreement shall be referred to senior representatives for negotiation for 15 days, failing which to mediation for 15 days, and thereafter finally resolved by arbitration under the Arbitration and Conciliation Act, 1996 by a sole arbitrator seated in [City]. Interim relief for protection of intellectual property and confidential information may be sought from courts of competent jurisdiction.”

Founder checklists and calculators

Equity split calculator (use before vesting)

  • Score founders 1–10 across idea origination, capital committed, time commitment, domain expertise, networks, prior IP contributed; translate scores to % and then apply vesting; schedule refresh after Seed.

IP clean‑room checklist

  • Personal vs company devices; repo ownership; dependency licenses (OSS); contributor license agreements; prior employer conflict memo; signed IA/NDA for every contributor.

Solicit‑risk assessment

  • Map top 20 customers and top 20 employees at risk; define “substantive contact” window; specify 12–24 months duration; ensure exceptions for general advertising.

India‑specific enforceability notes for 2025

  • Non‑compete post‑termination: generally void under Section 27 ICA; courts reiterate this position (Delhi HC 2024–25). Use confidentiality and non‑solicit instead.
  • IP chain‑of‑title: employees vs contractors differ; contractors require explicit assignment; include moral rights waiver to extent permitted.
  • Reverse vesting: common and investor‑friendly; be precise on repurchase rights, acceleration, and definitions.

Template bundle (copy‑ready snippets)

Founder reverse vesting (summary)
“…48 months, 12‑month cliff; repurchase unvested at cost; [25–50]% acceleration on double‑trigger; ‘Cause’ includes fraud, felony, willful misconduct; ‘Good Reason’ includes material pay cut or role demotion without consent.”

Invention assignment + confidentiality (summary)
“…hereby assigns all IP now or hereafter created relating to Company Business; waives moral rights to extent permitted; agrees to execute further assurances; keeps Confidential Information secret; return of materials at exit.”

Non‑solicit (summary)
“…12–24 months; limit to employees with material interaction and customers with substantive contact; carve‑out for general advertising; no non‑compete.”

Mistakes to avoid (litigation triggers)

  • Issuing founder shares without reverse vesting and repurchase rights.
  • Skipping contractor IP assignments and retrospective agreements for early contributors.
  • Relying on broad non‑compete instead of enforceable confidentiality and non‑solicit.
  • No exit valuation method; buyback pricing disputes escalate fast.
  • Ambiguous roles/decision rights; 50/50 deadlocks freeze bank accounts and product releases.

Action plan for this week

  • Draft founder vesting and repurchase addendum; sign before external capital.
  • Execute founder/employee/contractor IPAs retroactively; fix chain‑of‑title gaps; inventory OSS licenses.
  • Replace any non‑compete with non‑solicit + confidentiality; align with latest Delhi HC guidance.
  • Insert mediation‑first and sole‑arbitrator DR; add interim relief carve‑out for IP/confidentiality.

By locking in reverse vesting, bulletproofing IP assignment, and using enforceable non‑solicit and confidentiality protections, founders can prevent the disputes that most often derail funding and force avoidable litigation. These clauses—signed early and revisited at each financing—are the cheapest insurance policy a startup can buy.

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