One of the most common pitfalls we see with startups is the failure to either properly register or assign the company’s intellectual property. This detail is often lost in the desire to move forward with fundraising attempts or hiring new employees but it is one of the core foundation issues that we see in advising all early stage enterprises. Even some of the most sophisticated clients we service are sometimes unfamiliar with the required steps to effectively ensure that intellectual property produced by employees and independent contractors becomes property of the company. Failing to properly register your IP, and settling any associated disputes, can kill your deal.
Problems that arise when your IP is not properly assigned
Let us look at a quick example. Imagine a situation where Acme Co. hires an independent contractor to design its website and the site has certain copyrightable and patentable features. The independent contractor does the work but Acme Co. does not have her sign an intellectual property assignment agreement. Months later, Acme Co. launches its website and is wildly successful raising $5 million in Series A Financing.
We can all imagine what happens next: the independent contractor comes with a letter from her lawyer claiming she owns the intellectual property in Acme Co.’s website. Acme Co. may argue that the creation of the website was a “work for hire” but that argument will fall to the ground quickly. Here’s why. Although the default rule under the work for hire doctrine of U.S. copyright law states that copyrightable works that are created by employees within the scope of their employment belongs to the company, this doctrine often does not apply to any copyrightable works created by independent contractors. Copyrightable works created by independent contractors will belong to the company only if assigned. Also, under applicable employment law certain team members who will be doing work for your company during the early stages cannot be classified as company employees so best practices should be to have each team member sign an assignment agreement, assigning all copyrightable works to your company to remove all doubt. Absent an enforceable intellectual property assignment agreement employees and independent contractors of your company may own the inventions or other work product despite these works being developed for the company.
Remove all doubts by having parties sign an IP Assignment Agreement.
The process of protecting your intellectual property is simple and straightforward and should be one of the first things on your mind after you form your company. Before discussing your idea with any third parties get them to sign agreements that require them not to disclose your confidential information. When hiring independent contractors get them to sign IP assignment agreements because otherwise their intellectual property will not qualify as property of your company under the work for hire doctrine. This is good housekeeping and it is the kind of thing that inspires confidence in future investors. When they ask who owns your intellectual property and you can credibly say that you are the owner and provide the necessary documents attesting to that fact.
In our earlier example if Acme Co. wants to claim ownership of the work created by the independent contractor, it would need an IP Assignment agreement between the company and its independent contractor who created the website. An IP assignment does not have to be a long document. It can be as short as a “one pager.” In return for any IP assignment be sure to pay your independent contractor as an assignment without payment may fail due to “lack of sufficient consideration.”
In connection with any IP assignment agreement Acme Co. would include provisions relating to nondisclosure of confidential information, non-compete and non-solicitation. These provisions are paramount in any contract with independent service providers and employees. It is incumbent upon you to ensure that the information you reveal to third parties is kept confidential. Model forms of these agreements can be found online and are a good start to try and understand the issues and key provisions related to these agreements.
Perform a trademark search on your company’s name.
Another preliminary matter related to your company’s IP is to conduct a name search to check the availability of your company’s name in the state of incorporation and other jurisdictions where your company intends to do business. Do a trademark search on your company’s name and reserve all related domain names.
One final point on the signing of IP assignment agreements: to the extent that you have already hired employees or consultants and their offer letters did not include an IP assignment provision, have them sign an agreement at a later date covering previously created intellectual property. When doing so, if you are requiring additional restrictions on your employees best practices suggest that you pay additional compensation because in some jurisdictions an employee’s continued employment will not always qualify as adequate consideration for signing the new agreement. As always in these situations, sit down with a trusted legal advisor to walk through your options on registering and assigning company intellectual property. Once these issues are solved you are ready to move on to focusing on other matters related to growing your company.