Does Your Startup Own the IP Created by its Founders?

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.