As we discussed in our inaugural posts in this series, after management, the most valuable asset for most startups can be their intellectual property (IP). And as such, it is important for a startup to own its intellectual property. That sounds simple enough, right? Wrong!
In the early stages of a startup, individuals typically collaborate informally to develop their ideas and a business plan. A company may not be formed yet. There may be no formal agreements among the individuals. Additionally, some of the collaborators may be employed by other companies while waiting for the startup to launch. As part of employment with such companies, certain collaborators may be obligated to assign his or her contributions intended for the startup to their current employer. Without any formal agreements or even a formal entity to own IP, any IP generated or derived from an informal collaboration may be owned by individuals personally or worse yet, depending on the circumstances, by another company. Every potential investor or acquirer will perform due diligence to make sure that all of the company’s IP is owned by the company. From the outset, every startup needs to consider these ownership issues which can cause barriers to funding or acquisition or otherwise limit valuation in the future.
Below are 3 of the most common reasons a startup may not own all of its IP.
This typically occurs if the inventor, at the time of the invention, is currently employed by another company or has recently terminated employment with a company. Most employment contracts include provisions that detail who owns the rights to inventions invented by the employee. These provisions may indicate that any invention substantially related to the job description of the employee are to be assigned to the company, and therefore, the company owns rights to the invention. In some contracts, these provisions may be broadly written and may assign the rights to any invention invented by the employee to the company. As such, it is important for startups to review the employment contracts of their inventors to determine if the rights to their inventions are subject to a claim that they have been previously assigned to a former employer or other company affiliated with the inventors.
This situation typically arises early in the life of a startup when there is no formal agreement between inventors, founders and/or collaborators. Before an entity is formed, many startups start working on and developing their IP. It is not certain if and what type of entity may be formed or whether the business will be formed. As one can imagine, hackathons are hotbeds of these situations in which IP is developed ahead of the business. At hackathons, people will typically pitch ideas to a group of people who then form teams to help take the idea to the next level. The people that form a team often do not know each other and as such, start working on the idea without having any conversations regarding IP. At the end of the hackathon, one or more of the people will decide to form a company, while the remaining members of the group move on to pursue something else. If one of the remaining members of the group contributed towards an invention, they may be an inventor and therefore, have rights in the IP. Inventors who have not assigned their rights in the patent application to the company have the right to assign their rights to anyone else or license the technology to a competitor without the company’s permission. To avoid situations in which an inventor refuses to assign his or her IP rights to the company, one would be remiss to not have a formal agreement with other inventors regarding the rights to the invention. Resolving the issues that result from an inventor who refuses to assign his or her IP rights can be an expensive and complicated problem that may haunt a company when it raises capital, and often, after the company has had some success. Once a company is successful, an inventor may sue for larger amounts of money, and many successful companies want to avoid the negative press that arises out of such a situation. – Therefore, prior to inviting others to help you on your idea, ensure that there is a clear understanding regarding the ownership of the IP rights to the invention.
This situation may arise when a startup utilizes an independent contractor or third-party entity. Many times a startup needs to temporarily hire or leverage third parties to help further develop or implement IP. For example, a startup may hire a third-party development firm to develop a mobile app, a user interface or some other portions of the technology. . Inevitably, there is some IP that will result from this development that is needed to be owned by the company. Without a proper agreement in place between the startup and the third-party development company, it is likely that the third-party development company will own at least some of the IP that results from their development. To prevent a situation in which the third-party development company, or for that matter, any independent contractor or company, from owning the rights to IP for work that they perform for your startup, the startup should have the independent contractor or company sign an agreement that assigns the rights to any IP that results from the engagement of the independent contractor or the company to the startup. Moreover, the agreement should be written such that those rights are assigned to the startup at the time the IP is first created. This will prevent the startup from having to chase down inventors (the independent contractor or individuals working at the company) to assign their rights to the startup.
Implementing policies to ensure that a company owns its IP can be relatively simple if appropriate steps are taken. For starters, companies should have employees and contractors sign agreements that address IP ownership. Companies should also investigate if an employee or contractor has pre-existing obligations to assign their rights to another entity. Following best practices from the outset can help prevent significant IP issues in the future. Additional information on identifying and protecting your IP can be found here.