Contractor and consultant agreements

1. The core idea#

Most deeptech startups do a lot of early work through people who are not employees: a freelance firmware engineer, a CAD designer, a contract research organisation (CRO) running tests, a regulatory consultant, a part-time CFO, a design agency. That is sensible at pre-seed, because it keeps fixed costs low.

The legal starting point is the opposite of what most founders assume. If a contractor creates something and the contract says nothing, the contractor usually owns it, in India, the US and the UK alike. Paying an invoice does not transfer IP. You get, at best, an implied licence to use what you paid for, which is not enough to raise money on or to file a patent.

So a contractor agreement has two jobs:

1. Move ownership of the work to the company, with a written, present-tense assignment, plus confidentiality and a promise to help with patents.
2. Keep the relationship genuinely independent, so that tax and labour authorities do not treat the person as an employee, with back taxes, contributions and penalties to pay.

The two pull in different directions. The more you control how and when someone works, the more they look like an employee. The answer is to control the outputs (deliverables, specifications, deadlines, ownership) and leave the methods to them.

Who this is for: founders using freelancers, agencies, CROs, consultants or offshore development teams; anyone paying a friend or a former colleague to "help out"; anyone preparing for diligence who has paid contractors without paperwork.

Pairs with: 4.09 (employees), 4.11 (advisors), 4.05 (founder IP) and 2.18 (trade secrets).

2. What the evidence and the law say#

US: "work made for hire" does not cover most contractor work. Under the Copyright Act (17 U.S.C. §101), work by an independent contractor is a work for hire only if it falls into one of nine listed categories (such as a contribution to a collective work, a translation or a compilation) and both sides agree in writing. Software, hardware designs and lab reports are usually not in those categories. The Supreme Court confirmed in CCNV v. Reid (1989)

that a commissioned work belongs to its creator unless one of those conditions is met. Patents are never works for hire. You need an express assignment. Agreements normally say "work made for hire, and to the extent it is not, the contractor hereby assigns".

A California trap. Under California Labor Code §3351.5(c) and Unemployment Insurance Code §686, a person who signs a contract treating their work as work-for-hire can be treated as an employee for workers' compensation and unemployment insurance purposes. Many California lawyers therefore leave the work-for-hire wording out of agreements with individual California contractors and rely on assignment alone.

US classification. Federal law asks whether, as an economic reality, the worker is in business for themselves. The Department of Labor's 2024 rule weighed six factors equally. In February 2026 it proposed to replace that rule with one close to its 2021 version, which gives most weight to two factors: control over the work, and the worker's chance of profit or loss. Comments closed on 28 April 2026; check whether a final rule has been issued. States can be stricter: California's ABC test (AB5, 2019) treats a worker as an employee unless the work is outside the usual course of the hiring company's business, among other conditions. That is hard to meet when a startup hires a freelance engineer to do its core engineering.

UK: IR35 depends on the client's size. When a contractor works through their own limited company, the off-payroll rules decide who judges whether the role is really employment. If the client is small, the contractor's own company decides and bears the risk. A company is small if it meets two of these three tests: turnover no more than £15 million, balance sheet no more than £7.5 million, no more than 50 employees. These limits apply to financial years starting on or after 6 April 2025 (previously £10.2 million and £5.1 million). Almost every pre-seed startup is small. Once you are not, you must issue a Status Determination Statement for each contractor and, if they are inside IR35, deduct tax and National Insurance.

UK IP law follows the US pattern. Copyright in a commissioned work stays with its author unless assigned in writing (Copyright, Designs and Patents Act 1988, s.90(3)). Inventions by a contractor belong to the contractor; the employer rule in Patents Act s.39 applies only to employees.

India: the defaults are similar, with an unusual extra rule. Copyright Act s.17 gives the employer ownership only for work made under a contract of service (employment), not a contract for service (a contractor). An assignment must be in writing and signed (s.19). Section 19 also has defaults that catch people out: if the assignment does not say how long it lasts, it is deemed to last five years; if it does not name the territory, it is deemed to cover India only; and if the assignee does not use the rights within one year, they may lapse unless the agreement says otherwise. A good agreement says expressly: perpetual, worldwide, and no lapse for non-use.

Why it matters in money. Misclassification means back payroll taxes and contributions, interest and penalties. In the US it can add employee benefit claims, and under the UK's Employment Rights Act 2025, holiday-pay and unfair dismissal claims grow if a worker is found to be an employee. The IP risk is less visible but bigger: an investor will not fund a company whose core code or design is owned by a freelancer who is no longer reachable.

3. The method#

Step 1: Pick the right structure#

• A master services agreement (MSA) plus a statement of work (SOW) for each project. Best for anyone you will use more than once. The MSA holds the legal terms once; each SOW sets the scope, deliverables, dates and price.
• A single consulting agreement. Fine for one short, well-defined job.
• The vendor's own terms. CROs, test labs and large agencies will send their standard contract. Read the IP clause first: many keep ownership of their methods and "background IP", and some try to keep results too. Push for ownership of all results and data generated for you.

Step 2: The clauses that matter#

Step 3: Act like a client, not an employer#

• Agree outcomes and deadlines, not daily hours.
• Do not give them a company email title such as "Head of", put them on the org chart, or include them in employee benefits or the all-hands staff list.
• Let them use their own equipment where practical.
• Review the arrangement every six months. If someone is working full time, only for you, on core work, with no end date, they are probably an employee in substance. Convert them (4.09) or restructure.

Step 4: Equity for contractors#

Contractors can receive options in most places, but the rules differ. US: non-qualified stock options or restricted stock under Rule 701, not ISOs. UK: not EMI, which is for employees only; use unapproved options or growth shares. India: ESOPs under the Companies Act are for employees and directors, so contractors usually get phantom stock or a cash bonus instead. Treat any equity as consideration and put it in writing with the same IP terms.

Step 5: Clean up the past#

List everyone who has ever been paid to create anything you use: code, designs, data, test results, logos, website copy. For each, find a signed agreement with an assignment. Where there is none, send a short confirmatory assignment with a small payment. Do it while relationships are friendly. A freelancer you have fallen out with may ask for a lot more.

Worked example#

OrbitSense, a UK satellite-sensor startup (6 staff, £400k turnover), uses three contractors:

• A firmware engineer in Poland, working through her own company, about 3 days a week for 5 months.
• A CRO in Germany running radiation-tolerance tests on prototype boards.
• A freelance designer in Bengaluru producing the logo and website.

What they do:

1. The firmware engineer signs an MSA with English law and arbitration, with a SOW per firmware release, fixed fees on acceptance, and a full assignment. Because OrbitSense is a small company under the IR35 test, her own company decides her status; OrbitSense still records why the role is outside (she sets her own hours, has other clients and supplies her own kit).
2. The CRO's standard terms say the CRO owns "methods and results". OrbitSense negotiates: the CRO keeps its test methods, OrbitSense owns all results and data about its boards, and the CRO cannot publish them.
3. The designer signs a one-page agreement assigning copyright worldwide, perpetually, with no lapse for non-use, because the default Indian rule would limit it to India for five years.

At seed diligence, the investor's lawyer asks for the assignment chain for the firmware. OrbitSense hands over the MSA, the four SOWs and acceptance emails. The question takes a day instead of a month.

4. Country notes: India, US, UK#

Points to watch:

• India. Many founders pay friends and freelancers by UPI with no agreement and no TDS. Both create problems in diligence. Put an agreement in place and deduct TDS from the first payment. If a contractor works full time, with a company laptop and email, for many months, the Labour Codes' push to formalise employment makes them look like an employee. Consider a fixed-term employment contract instead, which now carries pro-rata gratuity after a year.
• US. The person's home state matters, not yours. A freelancer in California is assessed under California rules even if the company is in Delaware and run from Texas.
• UK. If a contractor is a sole trader rather than working through a company, IR35 does not apply, but ordinary employment status tests do. Keep a written note of why the person is self-employed.
• Contractors in other countries. Some countries presume employment more readily than these three (several EU countries, for example). For long, full-time engagements abroad, an employer of record (4.09) may be safer.

Check before relying on the US federal test: the DOL's February 2026 proposal may have become final since this was written, and some courts apply their own versions of the economic reality test regardless.

5. Scripts, mistakes, related playbooks, sources#

Scripts

Starting with a new freelancer:

"Before you start, here's our standard services agreement. The main points: we pay per milestone on acceptance, you own your tools and methods, and anything you build for us belongs to us. If you plan to use any of your existing code or open-source libraries, list them in the SOW so we both know what's included."

Negotiating a CRO's or agency's IP clause:

"We're fine with you keeping your methods and equipment know-how. But the results, data and anything specific to our device need to belong to us, because our investors and our patent filings depend on it. Can we change clause 9 so that results and data generated for us are assigned to us, and you keep a licence to your general methods?"

Fixing a gap with a past contractor:

"We're preparing for a funding round, and the lawyers have asked us to confirm we own the work you did for us last year. Here's a one-page confirmation, with a small payment for your time. It doesn't change anything about how we worked together."

Common mistakes#

1. No written agreement, or an invoice only. The contractor owns the work.
2. Relying on "work made for hire" alone in the US. It rarely covers software or hardware, and in California it can create employment status.
3. Indian assignments with no duration or territory, which default to five years and India only.
4. Accepting a CRO's standard terms unread, and finding they own your results.
5. Treating contractors as staff: fixed hours, company titles, all-hands, full-time for a year. That builds a misclassification case against you.
6. Not deducting TDS in India, or not collecting a W-9 in the US.
7. Copyleft code slipped into core code by a contractor without telling you.
8. Subcontractors who never signed anything, so the chain of title breaks one level down.
9. Offering EMI or ISOs to contractors. Neither is allowed.
10. Leaving clean-up until diligence, when the contractor has moved on or has leverage.

Related playbooks#

• 2.16 Open source or proprietary
• 2.18 Trade secrets vs patents for process technology
• 4.05 Assigning founder IP to the company
• 4.09 Employment contracts, NDAs and invention assignment
• 4.11 Advisor agreements (FAST template)
• 4.14 Customer contracts: MSAs, SOWs and pilot agreements
• 4.15 Joint development agreements and who owns co-developed IP
• 4.19 FEMA, FDI and ODI rules for foreign money

Sources#

• US Copyright Act, 17 U.S.C. §101 (work made for hire), §204; Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989); 35 U.S.C. §261.
• California Labor Code §3351.5(c); Unemployment Insurance Code §686; AB5 (2019), Labor Code §2775.
• US Department of Labor, proposed independent contractor rule, 26 February 2026; Holland & Knight summary.
• One Big Beautiful Bill Act s.70433 (1099-NEC threshold): TaxBandits, Deel.
• UK off-payroll small company thresholds from April 2025: BDO; HMRC ESM10006A.
• UK Copyright, Designs and Patents Act 1988 s.90(3); Patents Act 1977 s.39.
• India Copyright Act 1957 ss.17, 19.
• India Income-tax Act 2025 s.393 (TDS), in force 1 April 2026: India Briefing, TaxGuru rate table.