As an IP attorney who has conducted due diligence for VCs, Angels, and acquiring companies, I’m wondering:

Is your startup ready for due diligence?

Do you even know what that means?

Let me explain what IP due diligence is and why your preparation today is important.

If you are very fortunate and a savvy investor or company wants to invest in or buy your company, your startup will likely be subject to a process called “due diligence.” This means that one or more attorneys will carefully examine your IP and company records — its contracts, licenses, assignments, and IP filings.  They will ask a lot of questions about what you have done in the past and they will judge your credibility and IP knowledge.

The attorneys will be trying to find out what you have done right and what you have done wrong. They will be trying to find potential liability and risks for the investors.

Don’t kid yourself.  It is highly likely that the attorneys will find where you have screwed up.

Importantly, the attorneys will be ascertaining whether your startup owns the IP it says it does or whether it has failed to do what is necessary to nail the IP to the company.

• Do you have proper signed, written IP assignment agreements with all founders, key contractors, and employees that transfer all IP to the company?
• Have you used cheap, sketchy foreign contractors to create your key technology with self drafted contracts?
• Do you really have the right to use the IP you say you do or are you missing a critical license from a university or consultant?
• Are former employers of the founders threatening to sue for trade secret misappropriation and ownership of the key technology?

These are just a few of the issues the attorneys will examine.

If the attorneys find problems, like your startup doesn’t own the IP or it’s at high risk for potential liability, your deal may be derailed.

Sometimes the problems can be fixed and sometimes they can’t.

Moreover, it can be a huge headache for you to try and track down what you are missing, like IP assignments from a departed founder or stray licenses to part of your code. For example, if you don’t know who created your software code or where it came from, you can be in big trouble if the code with the questionable genealogy is the foundation for your business. Or if you have an offer for a million dollars for your great website, your deal may collapse because your site is loaded with infringing material and you only have weak implied licenses to the content.

Make sure you do what you need to do to ensure that your startup owns it’s IP or has proper licenses–NOW. It may be simple to do today and impossible tomorrow.

You want to be prepared for IP due diligence and not delay or derail your future deals.

Jill Hubbard Bowman is an intellectual property attorney who helps startups do things right.

Related posts:

Analyzing the Risk: Will My Current Employer Claim Rights to my Startup’s IP

Does Your Startup Own the IP Created by the Founders

Who Owns the IP Rights to Custom Software?

How to Avoid Trademark Infringement When Selecting Business or Product Names

One of the biggest, most frequent mistakes I see as an intellectual property attorney is a startups’s lack of ownership to all of the exclusive rights to the intellectual property created for it.

One of the most damaging omissions is not taking the proper steps to ensure the company owns all of the rights to the IP created by all founders.

You should all sign the IP assignment agreements at the very beginning when everyone is committed to the company’s success.

If your company does not own the rights to the founders’ work, a founder may walk off and take their IP rights with them. This may leave the company in a precarious position if the founder’s IP is central to the company’s key technology.

For the company to own all of the IP rights, all founders must sign an IP assignment agreement that transfers the IP to the company.

And the contract must have a provision that sweeps back and captures work done before incorporation.

Most standard form agreements don’t have this provision. It is special to the needs of startups. If a corporate attorney gives you the IP assignment forms, make sure you ask about this type of retro-provision and get it included in the agreements signed by the founders. Also, beware of do-it-yourself contracts drafted by non-lawyers. They usually don’t have the proper “magic” legal language that transfers the IP to the company despite the attempts to do so.

If you don’t have a written assignment agreement that sweeps back and captures the IP created before and after incorporation, your company won’t own all of the IP rights of the founders.

Lack of proper contracts may have very serious consequences.

If the departing founder created the work on his own before incorporation or when he was not a company employee, he may own all of the IP rights to his work. And when he walks out the company may be left with shallow arguments about fiduciary duties and his obligation to transfer the IP back.

Worse yet, the departing founder may start a new company in competition with the old company and transfer his IP rights to the new company.  Leaving the prior partners with a worthless, empty shell of a company.

Reports say this is exactly what Mark Zukerberg did with Facebook.  The original Facebook company was incorporated in Florida but Mark did not assign the IP rights to the Facebook software to the first company.  And after Mark had a falling out with his partner Eduardo Saverin, Mark hired a real startup lawyer, incorporated Facebook in Delaware (like a savvy startup would do), and assigned the IP rights for the software to the new company.

The resulting lawsuit was eventually settled. But I bet the legal bills were huge.

Similarly, if the work of the founders was a joint work, and the remaining partners assign their rights, the company may have rights to exploit the work. But the rights won’t be exclusive.  The departing founder may exploit the work too, without any obligation to make an accounting or pay the other creators. This scenario makes most investors run scared.

Do your startup a favor. Get all founders to sign a decent contract drafted by a professional that transfers all IP rights to your company. And do it before the founders walk out the door.

Jill Hubbard Bowman is an intellectual property attorney who helps startup companies own their IP.

Savvy investors hire lawyers to conduct IP due diligence before investing in a software startup for a very good reason:

All too often the startup does not own the exclusive IP rights to its software!

Usually the startup doesn’t own the IP rights to its software because of carelessness, a cavalier attitude toward contracts, and a basic misunderstanding about the law.

Many parts of IP law are counterintuitive and defy what people consider “common sense.”

It’s important for startup founders to learn a little about IP law to protect their hard work and investment and keep them out of legal trouble.

WARNING:  If your startup does not own the copyright to its software or have a proper license from the developers who created it allowing the startup to sublicense the software and make derivative works, the startup may be committing copyright infringement when it copies or modifies the software and sublicenses it to others.

And the startup’s customers may be committing copyright infringement too.

Ignorance of the law is not an excuse that will get you off the legal hook.

Sometimes the founders just don’t care. They know they are playing fast and loose with IP ownership of the startup’s alleged software.  But they don’t want to find or pay for proper contracts and do things right. In these cases, the startup’s licensing campaigns, contract warranties to other companies about IP ownership, and sale of stock in the company with a valuation based on the value of the software, simply smacks of fraud.

Frequent sad scenarios where the startup does not own the IP rights include the following:

• The founders don’t sign IP assignment agreements that capture the IP they created before incorporation and transfer it to the company.  A founder may walk off and assign their IP to another company, like Facebook’s Mark Zuckerberg did. Of course he got sued.

• The startup thinks that because  it paid for the software’s creation and had an NDA with the developers they own the IP rights.

Wrong! It doesn’t matter that the startup paid for the creation of the software. Payment doesn’t transfer IP rights.

Without a proper contract assigning the IP rights to the startup that is signed by the developers, the startup usually has nothing more than a revocable, implied license, which is almost worthless.

• The startup hires a software development company that uses independent contractors who have not assigned their IP rights to the software development company. The development company can’t pass through IP rights they don’t own to the startup. The startup does not own the rights.

• The startup and an independent developer sign a contract but the contract does not have the correct language transferring the IP rights to the startup. The developer retains the IP rights.

• An entrepreneur incorporates a new startup  to sell IP created by her former company.  Without proper IP transfer or license agreements, the new startup does not own or have the proper rights to agree to contractual IP warranties with the new company’s software customers. It’s another implied license scenario.

In the circumstances above, no smart company would pay money for a license to the startup’s alleged software or buy it as an asset.

The moral of the stories is the startup must have proper written contracts signed by all software developers.

The contract must have proper IP transfer language (not simply a statement that the job is a work for hire) and be physically signed by all developers.

IP assignment contracts preserve the value of the startup’s software asset and help avoid legal liability for infringement and fraud.

Jill Hubbard Bowman is an intellectual property attorney who helps companies own the rights to the software created for it.

For related posts explaining copyright law see the following:

• Who owns the rights to custom software?
• How to destroy the value of your software
• Critical legal issues for your website

For Happy Business Marriage Part 1: The Background Check

Although the Secret Third-party Infiltrator is a huge threat, the individuals to a collaboration have several other things to iron out before dancing through the daisies hand in hand.  To review – under both the patent and the copyright laws:

If there is more than one inventor or creator – each inventor or creator owns an equal and undivided interest in the whole invention or creation.  This means that each of the co-inventors or co-creators can exercise any of the rights that patents or copyrights bestow. 

More importantly, each of the co-inventors or co-creators may exploit those rights without the consent of and without sharing the profits to the other co-inventors or co-creators!

Therefore, prudent collaborators iron out their relationship ahead of time and address, in writing, such issues as:

1. How are we going to protect the Intellectual Property in the Work we create?
   • If you are going to seek patent or copyright protection for the product of the collaboration, it is important to get everyone on the same page.  There will be expenses involved, but more importantly there will be duties involved – for example, you have to agree ahead of time to keep good notes and not publish or otherwise disclose the invention before a patent application is on file.
   • Case in point – three fantastic scientists, each from a different continent, get together at a Research Institution to collaborate for a few weeks.  They create an amazing application that allows doctors to examine and diagnose patients remotely.  When the collaboration party is over, each of the collaborators goes back to her home country.  One of them submits an invention disclosure to the Research Institution.  One of them just goes back to playing the guitar on her porch in north Georgia.  However, before the other two have even stepped off the airplane, the third collaborator has fully disclosed the invention on her blog.  While the Research Institution would like to protect and commercialize the resulting product (and shoot some money back to the three collaborators) the publication has destroyed novelty in several countries, which prevents patent protection in those countries
2. How are we going to exploit the work that we create?  Are we going to exploit jointly or are we all going to go our separate ways and exploit it in competition with one another?
   • Unless the collaborators have an advanced agreement, each of them can exploit the entire work (regardless of their respective contribution to the work) in competition with the others.
   • It is important agree in advance that, for example, all of the collaborators must agree on how the invention is exploited.  This type of agreement give confidence to potential investors that a “wild man” co-inventor won’t go out selling the invention to competitors, thereby destroying it’s valuHow are we going to split the profits from the collaboration?
3. In the absence of an agreement, there is no duty to split profits. If you are a co-inventor with a Behemoth due to a collaborator’s employment agreement – Behemoth has no duty to give you a cut of its profits.

These are just a few considerations to be aware of when you are beginning your collaborative relationship.  There are many others.

The take home message is to get a written agreement while you are still in love, don’t wait until the million dollar baby is born and you are fighting over who gets the arms and who gets the legs.  The patent and copyright laws won’t be as generous as King Solomon – they won’t split the baby in equal parts.  Rather, its every collaborator for herself – may the best exploiter win!

Heather N. Schafer is an intellectual property attorney who hates to break bad news to inventors with soured co-inventor relationships.

The creative endeavor is one of the most beautiful relationships that two or more people can enter into together.  Creative ventures thrive on collaboration and there is no law against how many can join the venture.  However, it is important to know a sobering effect of joint works and inventions under both the patent and the copyright laws:

If there is more than one inventor or creator – each inventor or creator owns an equal and undivided interest in the whole invention or creation.

This means that each of the co-inventors or co-creators can exercise any of the rights that patents or copyrights bestow (e.g., making, using, selling, and importing patentable inventions and reproducing, distributing, performing, and making derivative works of copyrightable inventions).

More importantly, each of the co-inventors or co-creators may exploit those rights without the consent of and without sharing the profits to the other co-inventors or co-creators!

Therefore, in the honeymoon bliss that occurs at the genesis of a creative project, it is important to get a few things straight up front.  Such as:

For each party to the collaboration – what kind of contracts might we have entered that would give a third party ownership interest in our creations, be they patentable or copyrightable?

1. Think – employment agreements, independent contractor agreements, our spouse (especially if one party has a pending divorce), University policies (if the parties are graduate students or faculty).  We can refer to these as STI’s (Secret Third-party Interests).
2. If one of your collaborators is subject to, say an employment agreement or University IP policy, all of a sudden your database expert, Jane, is no longer at the table – instead you are a co-owner with her Behemoth employer or her University.  These entities may have very different ideas about how to exploit the work and may make exploitation of the work complicated if not impossible.
3. Case in point – two engineers get together to work out a novel method of cleaning up oil spills.  Each engineer works for a different company.  One works for a small local company that provides the skilled ground crew to clean up the oil spill.  The other engineer works for an international Behemoth company that manufacturers oil remediation equipment.  The engineers, being at the bottom of the totem pole, envision leaving their companies and starting their own venture around the method – one in which they merely buy equipment from the Behemoth and then set out to save the world and receive 100% of the market share.  However, Behemoth has a different idea – it owns the rights to the invention through its employee agreement with the co-inventor engineer.  Even though the Behemoth cannot stop the small co-inventor from practicing the invention, it can practice the resulting invention in competition with the small co-inventor.  With its international distributors everywhere on earth, it quickly dominates the market for the method and leaves the two inventing engineers empty handed.

The importance of a Background Check (firmly scrutinizing your future collaborator’s existing agreements to identify STI’s) is lost on many in the first blush of love.  The important problems that can be raised by unrevealed third party interests will be further explored in the next post.

Until then – the take home message is to (1) keep copies of your contracts and policies, (2) if you don’t have copies, go ask for them, (3) ask to see the paperwork showing that your collaborators are clean of STI’s before things get hot and heavy.

Heather N. Schafer is an intellectual property attorney who helps entrepreneurs keep their IP interests straight.

When developing commercial software products that incorporate any type of open source software (“OSS”), it’s important to understand the basic difference between Restrictive and Permissive OSS licenses.  OSS licenses can have dramatic implications for the value of your final product.

To understand the different types of OSS licenses, it is first important to understand the difference between source code and object code. Source code is the text written in programming language by software programers.  For your computer to understand the instructions,however, the source code must be converted into object code (also called binary code) that the computer can read.   To change or modify the software, software programmers must have access to the source code.

Most computer programs that you buy are distributed in object code.  Commercial software companies usually strictly restrict access to the source code for their key products and protect it with trade secret and copyright law.

In an academic tradition, however, there are many software developers who work collaboratively, freely share source code, and distribute the resulting software under open source licenses without charge.  Hence, this type of software is referred to as open source software.  Open source software is an amazing resource and can greatly reduce product development time.  Open source software, however, is only as “free” as its attached license that legally limits what you can do with it.

Restrictive OSS Licenses

Proponents of restrictive licenses want to keep source code freely available to all. Restrictive licenses, like the GPL or Affero licenses, limit the terms of distribution of software that incorporates pieces of OSS licensed under its terms.  Restrictive licenses require that works based on the OSS relicense the resulting works to others on the same terms of the initial license and require the final source code be openly available for free or a nominal value.

Restrictive relicensing terms can dramatically lower or nullify the value of your final software product.

The rub is that when you incorporate different pieces of OSS into a larger product, the licenses may not be compatible with each other or with the license that you want to use with your final product.  Essentially, restrictive licenses can contaminate your larger product and create an intellectual property mess for those who want to change the licensing terms and  limit access to the product’s full source code.  Basically, if you incorporate OSS with a restrictive license into your product’s software family, the father or grandfather license will dictate what you do with the software children.

Permissive OSS Licenses

In contrast, permissive open source licenses allow you to license second generation software children without requiring access to the final source code.  With permissive licenses like the MIT, BSD and Apache OSS licenses, free is more free.

You can incorporate pieces of OSS into your product and restrict the access to the source code for the final product.  It is much easier to make all licenses compatible and comply with the terms of the original licenses, some of which simply require attribution, a copyright notice, disclaimer of warranties and limits on liability.

In short, it is important to read the licensing terms of any open source software that you want to use in a software product (or website) that you want to sell or sublicense.

The fine print can be very important.

Jill Hubbard Bowman is an intellectual property attorney who helps software developers create valuable products.

When navigating the complex legal landscape of open source software (“OSS”), it’s critical to understand that where OSS is concerned, free does not mean free.

OSS is “free” in the sense that you may use it without paying a fee.  Most importantly, however, OSS is NOT “free” of legal restrictions.  Indeed, some types of OSS licenses, like the GNU GPL, are highly restrictive.

Some software developers mistakenly believe that because they don’t have to pay a fee to have access to the OSS source code, OSS is in the public domain and can be freely used without any restrictions.

This is not the case.

OSS is not in the public domain — free of protection by copyright law.  Original authors of works licensed under OSS terms choose to retain their copyright ownership rather than expressly disavow their legal rights and release the software into the public domain truly free of any legal restrictions on use.

And some developers through OSS licenses use copyright and contract law to control licensing terms, downstream distribution and availability of the source code.

Despite their rallying cries of freedom, some  developers act like little dictators over their software and use OSS licenses to control the use and distribution of modified OSS as well as any software that incorporates or rub shoulders with the OSS.

Some licenses like the GNU GPL, the most commonly used type of OSS license, have flow down provisions that require the source code to be open to all when distributed to others. Consequently, modifications of the OSS or other new code that is combined into the same executable files created by subsequent developers may become OSS governed by the same restrictive licensing terms.

Restrictive licenses can create problems for software developers who want to legally protect and license their work based on OSS or code used in conjunction with OSS.  To protect the code’s commercial value, some developers want to protect their new source code as a trade secret and restrict access to the source code by others, especially competitors.  Tyrannical licenses, like the GNU GPL, prohibit this type of source code protection.

Jill Hubbard Bowman is an intellectual property attorney who helps software developers create strategies for dealing with OSS licenses.

A repeating theme on iplawforstartups.com revolves around the question: “Does my company have intellectual property?”

Our resounding answer is always, “Yes!”  Not only does every company we can possibly imagine have intellectual property, but often, intellectual property is the core corporate asset – the goodwill of the brand, a patented technology, copyrighted content, or valuable tradesecrets.

A savvy tattoo artist beautifully illustrates our mantra:

“Your company does have IP and it’s important to protect it.”

My friends tell me I am quite an amateur; I’ve only seen The Hangover one time.  The rest of the free world has been anxiously awaiting the opening of The Hangover Part II, to bask again in fresh hilarity and genius one-liners.  A savvy tattoo artist almost successfully put the breaks on our National Joy over Mike Tyson’s fabulous face tattoo! As we have all seen on the billboards, movie trailers, and movie posters, Stu – who woke up married to a gorgeous stripper named Jade in The Hangover – wakes up in The Hangover Part II with Mike Tyson’s face tattoo on his face!

Hilarious, correct? Not for Warner Brothers. Little did they know that the tattoo artist had taken steps to protect his intellectual property rights in the tattoo.  He sued Warner Brothers in federal court for copyright infringement and attempted to stop the release of The Hangover Part II. Here is a link to the official complaint with photos of the tattoos. The judge denied the motion for preliminary injunction that would have stopped the release of the movie because the harm would have been too great for Warner Brothers and the movie theaters.  Warner Brothers had already spent $80 million dollars to advertise the movie for Memorial Day weekend.  The judge, however, found that the tattoo artist was likely to succeed on the merits of the case as it goes forward in court.

The tattoo artist, S. Victor Whitmill, did several things correctly to protect his intellectual property rights:

• He recognized that he had intellectual property – a tattoo is an original work that is fixed in a tangible medium of expression. In this case, the tangible medium was Mike Tyson’s face.
• He recognized that his intellectual property was an important asset that he should protect.
• He identified the appropriate route of protection – a copyright.
• He used contracts to make sure the rights to his work were clean and clear – Tyson received the limited right to display the tattoo on his body – Victor retained all other rights in the tattoo.  In otherwords, Tyson received only the limited right to display the tattoo but Victor retained the broader more important rights to authorize copies, create derivative works, and to sublicense the work to others.

Victor did not register his copyright with the U.S. Copyright Office until April 2011, just before filing suit.  In order for Victor to assert his rights in the Tyson Tattoo, Victor had to have a Certificate of Registration.  Victor waited until the last minute to do this, which increases his litigation costs and increases his burden in litigation (he will only be able to recover the damages he can prove).  If he had registered his tattoo design with the Copyright Office within three months of applying the design to Tyson’s face – Victor would have been able to recover statutory damages, attorneys fees, and other remedies regardless of the amount of actual damage he could prove.

Therefore, all of our tattoo and creative-work startup friends out there (and there are some!) take note of the following lessons from The Hangover II lawsuit:

• Identify your creative works that may be protected by intellectual property law.
• Register your work with the Copyright Office.  IDEALLY register your work within the first 3 months of publication – for example:  You tattoo me on June 1, 2011 – you register your work BEFORE September 1, 2011.  Registering your work will make you eligible for statutory damages and attorneys fees if there is infringement.
• Have CLEAR CONCISE contracts with your client.  The contract should address:
  • Who owns the Copyrights in the work – you or the client?  (In the Tyson case – Victor the tattoo artist retained the copyright.)
  • The rights granted to each party;  (In this case, Tyson had the limited right to display the tattoo, Victor retained all other rights.)
  • Both parties should agree in writing that the amount the client paid for the rights received was fair and adequate.

And Finally, What happens in Vegas stays in Vegas, except for . . . tattoos! They will come back with you!

Heather N. Schafer is a tattooed  IP attorney who helps entrepreneurs protect their intellectual property.

If you’re like most folks, you may be annoyed by those boxes you have to check to agree to a website’s Terms of Use when you register.  You may be thinking, “What’s all the fuss about?”

The fuss has to do with protection from the onslaught of potential legal claims that may be brought against a website owner.  The Wild, Wild, Web of mass communication can lead to far reaching and unprecedented liability for a broad range of legal claims from copyright and trademark infringement to tort city — defamation, trade liable, unfair competition, tortious interference with contract and prospective business relations, infliction of emotional distress, misrepresentation, fraud, and violations of rights of publicity and privacy just to name a few.

If your business is based on a website, especially if you allow users to post or upload content onto your site, your website’s Terms of Use can provide critical, legal protection.

Here’s how.

A website’s Terms of Use (or Terms of Service) is actually a legal contract between the website owner and the user.  US courts will recognize a properly drafted Terms of Use as a legally binding contract and enforce the terms and conditions that can limit a website owner’s potential legal liability.  There was a brouhaha about the enforceability of these types of contract in the early days of the Internet because a Terms of Use contract is a legal odd duck.  First, the site owner may not even know the identity of the other party to the contract — the website user.  The website owner essentially sends out an offer to use its website and people across the world may accept.  This acceptance by use is good enough to form a legal contract, but making a user click a box is an even better form of acceptance– hence the boxes required by the wary lawyers.   Second, the terms of the website contract can be unilaterally changed by the website owner at any time by its very terms.  Seriously, this freaks out old school attorneys who don’t practice Internet law but it’s very useful for website owners.  Terms of Use may be legally odd but they have been enforced by the courts.

Terms of Use can protect and help a website owner in many ways:

• A Terms of Use contract can limit and give only a specific court in the website owner’s backyard power over a far away plaintiff’s legal case.  This is critical for a website owner who doesn’t want to face litigation in any state  (or fight jurisdiction).  An arbitration clause in a Terms of Use may also get a website owner out of a nasty class action suit because of a lack of jurisdiction.
• The Terms of Use contract can also have a very broad disclaimer of warranties related to the terrible things that can happen because of using the website and relying on the correctness and safety of its content.  Hurt people want to blame someone and The Terms of Use can legally shift and limit blame.  Malware anyone?
• The Terms of Use can limit permitted conduct and content in social sites and let the companies shift blame for bad things including tortious conduct.  I love the Terms of Use for on-line dating sites.  Good luck trying to sue them for emotional distress from on-line social harassment or a bad date.  (ISPs may have some limited immunity under the Communications Decency Act for third party torts but it is complex and not well established.)
• The Terms of Use can also set up a DMCA Notice and Take Down procedure that can help shield a website owner from copyright infringement by users who upload infringing content.  For a safe harbor, however, you must strictly follow the DMCA rules.  See Heather’s post about getting DMCA protection.
• A Terms of Use contract can also give a website owner a license to the copyright or trademark rights of an owner who uploads it onto the website, once again preventing infringement claims.  A Terms of Use contract can even transfer IP ownership rights of uploaded content to the website owner.  Facebook tried it.  Apparently, some IP lawyer for Facebook thought it would be a good idea if Facebook owned the IP to the uploaded content and it changed its Terms of Use contract to include an IP assignment.  Some artistic Facebook users got hopping mad at the change and Facebook changed its term back to a license.
• Website/software owners can also license downloaded software in its Terms of Use and restrict how others use the software.
• Website owners can also require the users to give warranties that can give the website owner a basis to sue if the warranties are breached.  An example of a website user warranty would be a promise to obey the law.
• My favorite is that a Terms of Use contract can limit DAMAGES.  Yes, it is possible to greatly reduce a possible damage award using a contract term.  A Terms of Use contract can include this big disincentive to sue.  YEA!!!  No website owner wants to be sued.
• I also love that some sites require the website user to INDEMNIFY THEM for claims.  They really pass the legal buck.

There are many ways a Terms of Use contract can protect a website owner but the specific terms need to be based on the activities and interaction on the website.

For kicks, you may want to actually read the Terms of Use before you click the box.  It could enlighten you about the legal rights you are giving up and bestowing.

Jill Hubbard Bowman is an intellectual property attorney who helps website owners protect themselves with contracts.

If your business is based on software and one day you want to make millions by selling your business or software, it’s important to have clean title or license to the underlying intellectual property rights.

You may be thinking, “No, Duh.  Of course my company has the rights to our software.”

But you may be wrong.

Because of the complicated nature of IP laws, many companies have a muddled IP mess and have destroyed the value of the core software.

Unfortunately for some, they don’t find out about the mess until they are sued or lawyers for a potential acquirer or investor take a close look during due diligence.

Sometimes, the mess can be cleaned up and sometimes it can’t.  Sometimes the value of the software has been destroyed along with the value of the company.

Here are some of the key ways to destroy the value of the software that your company hopes to sell:

1.  Allow Code Belonging to Former Employers To Be Incorporated Into Your Software

It’s no secret—developers often reuse code—and it’s one reason why trade secret litigation is so popular in Silicon Valley.  Some developers keep code belonging to their former employers and use it when building code for a new employer.  It saves time.  It’s just a little short cut.

But many software developers don’t consider the cost of the short cut or the implications to the value of the new code.  Former employers of the developers may claim that they own the new code and allege trade secret misappropriation as well as copyright infringement.

2.  Don’t Require Assignment of IP Rights To Your Company

If everyone who has written code for your company, including founders and independent contractors, hasn’t signed a written agreement that assigns the intellectual property rights to the company, the company doesn’t own all of the IP rights.  It’s a classic mistake.  If you don’t own the IP rights to the software, you can’t sell it.

3.  Allow Some Types of Open Source To Be Incorporated Into Your Code

Some types of open source code have very restricted licenses attached that require you to freely license the resulting work that incorporates the code.   Some licenses don’t allow you to resell or sublicense the modified code for money.

And don’t think you can hide the open source code.  During due diligence, a potential acquirer of your software or company may have your code scanned for tell-tale signs of open source with a restrictive license.  Finding restricted code can stall or kill a deal.  Getting a commercial license can take time, money and hassle.

In short, to protect the value of your code:

• Don’t allow code  that may be owned by someone else, especially the developers’ former employers, to be incorporated into your software without a clear license;
• Require EVERYONE who writes code to assign their IP to the company in a written agreement; and
• Only use open source code that has an unrestricted license (see the MIT licenses for good examples).

Don’t find out that the value of your software has been destroyed when it’s too late to fix it.  An early IP audit can help you identify the problems.

May you all create code worth millions.

Jill Hubbard Bowman is an intellectual property attorney who helps emerging growth companies protect their intellectual property and avoid legal liability.  She can be reached at hubbardbowman [at] me.com.