Does the Startup Own the IP Rights To Work Created by the Founders?

For startups that have multiple founders or shareholders, want VC funding, or intend to create a valuable company that can be sold for a fortune, the answer to whether the startup owns the IP rights to work created by company founders is critical.

Frequently, the startup founders are the people who have created the key software, product, invention, or business plans that form the core of the startup’s value.  And often, the founder’s critical work was done before incorporation of the startup as a legal entity.

In order to own the IP rights to the founder’s patentable inventions, works of authorship like software that are protected by copyrights, or trade secrets like business plans and technical know-how, the founders must sign a formal, written agreement that transfers the IP rights from the individual founders to the corporate entity.  Most critically, the agreement must specify that it covers the founder’s work prior to incorporation and the effective date of the agreement. Moreover, in some states, the founders must be paid an additional amount of “consideration” like stock to transfer the IP rights to the legal entity.  A standard employee invention assignment agreement usually lacks this critical prior acts clause and consequently won’t capture the founder’s prior work.

Unfortunately, failure to have founders sign a Founder’s Invention Assignment Agreement (“Founder’s Agreement”) is common in the startup world.

Failure to have signed Founder’s Agreements can be a critical mistake when one of the founders leaves the company or a dispute arises between founders.

Just ask Edward Saverin, one of The Facebook’s founders.

According to The Facebook Effect, by David Kirkpatrick, the original Facebook corporate entity was a Florida LLC that was basically “an empty shell” because the key founders who had created the IP, Zuckerberg and Moskovitz, had not signed over the crown jewels — their  IP rights to the software — to the original company.

After Saverin and Zuckerberg had their falling out, Zuckerberg finally engaged a startup lawyer in California, and TheFacebook was incorporated in Delaware:

Zuckerberg and Moskovitz signed over the critical IP to the new Delaware corporation.

The new company now controlled the most critical, valuable asset — the intellectual property rights.

Founders who want to create valuable companies need to make certain that everyone creating IP for the startup assigns the IP rights to the legal entity — even themselves.

Author and publisher Jill Hubbard Bowman is an intellectual property lawyer who helps startups protect their intellectual property and avoid legal liability.