Founder IP Assignment & Reverse Vesting: Protecting Your Cap Table
How to correctly assign pre-incorporation IP into your company, structure reverse vesting agreements with cliffs, and protect the cap table from departing founders using standard English law mechanisms.
Two of the most common structural errors made by technical co-founders are failing to assign pre-incorporation intellectual property into the company entity and failing to implement reverse vesting schedules. Both failures can be catastrophic at Series A due diligence: a single departing co-founder can walk away with 30–50% of your cap table and all the associated IP created during the critical pre-incorporation phase. This guide explains how to do both correctly under English law.
What is Founder IP Assignment?
IP assignment is the legal transfer of ownership of intellectual property — code, designs, trade secrets, algorithms, databases, and trademarks — from the individual founder to the company. In English law, copyright in software created by an employee in the course of employment automatically belongs to the employer under the Copyright, Designs and Patents Act 1988. However, work created before incorporation, or by contractors and co-founders who are not employees, is not automatically assigned. This gap must be closed by a written IP assignment agreement.
Critical point: If you spent six months building your MVP before incorporating your Ltd, all of that code legally belongs to you personally — not the company — unless you execute a written assignment. Institutional investors will identify this during due diligence and will either require it to be remedied (costly) or will reduce valuation to reflect the risk.
Drafting an IP Assignment Agreement
A standard founder IP assignment agreement should cover: (1) an assignment of all present and future IP created by the founder in connection with the company's business, including work created before the agreement date; (2) a broad definition of IP that includes copyright, patents, database rights, trade marks, domain names, and know-how; (3) a "further assurance" clause requiring the founder to execute additional documents as needed; (4) a nominal consideration of £1 (sufficient for a legally binding contract); and (5) a waiver of moral rights to the extent permitted by law. This agreement is typically executed as a deed to avoid consideration issues.
Reverse Vesting: Why It Protects Everyone
Reverse vesting is the mechanism by which co-founder shares are subject to company repurchase rights that lapse over time. Unlike forward vesting (used for employee options), reverse vesting starts with founders holding all their shares but subject to a compulsory transfer at nominal value if they leave the company before the vesting schedule completes. A standard schedule is four years with a one-year cliff: if a founder leaves before 12 months, the company can repurchase 100% of their shares at the original issue price. After the cliff, 25% of shares vest immediately and the remainder vest monthly over the following 36 months.
- 4-year reverse vesting schedule is the industry standard for venture-backed companies
- 1-year cliff: zero shares vest if the founder leaves before 12 months
- Post-cliff: 25% immediate vest, then monthly vesting of 1/48th per month
- Repurchase price is typically the original subscription price (e.g., £0.001 per share)
- Good leaver / bad leaver provisions determine whether the departing founder retains any shares
- Should be documented in the Shareholders Agreement and the Articles of Association
Good Leaver vs Bad Leaver
The shareholders agreement should define good leaver and bad leaver scenarios. A good leaver (typically defined as death, serious illness, or resignation with 6 months notice in agreed circumstances) is entitled to retain their vested shares and may receive fair market value for unvested shares. A bad leaver (resignation without notice, dismissal for cause, breach of restrictive covenants) forfeits unvested shares at nominal value and may be required to transfer vested shares at a discount. These definitions are heavily negotiated and the precise language matters enormously in a dispute.
Implementation Checklist
- Execute IP assignment deeds at incorporation for all founders who created pre-company IP
- Include IP assignment and non-compete clauses in all founder employment contracts
- Implement reverse vesting provisions in the Shareholders Agreement
- Update Articles of Association to include drag-along, tag-along, and pre-emption rights
- Ensure all contractor agreements include IP assignment and work-for-hire language
- Document all open-source code dependencies and confirm licence compatibility with commercial use
Do not use template agreements from the internet for IP assignment or reverse vesting. The nuances in English law — particularly around moral rights waivers, database rights, and the interaction between employment law and IP law — require a qualified solicitor. A well-drafted founders agreement costs £1,500–3,000 and protects tens of millions in future enterprise value.