It is important for entrepreneurs to ensure their startup company actually owns the intellectual property related to its business.
It is important for entrepreneurs to ensure their startup company actually owns the intellectual property related to its business.

A startup company’s intellectual property is often its most valuable asset.   Correspondingly, it is important to investors that a potential portfolio company own all of the intellectual property associated with its business.

Prior to investing, an investor will conduct a due diligence evaluation to ensure that the company in which it is investing owns all of the intellectual property associated with the business.  Intellectual property assignment agreements demonstrating a clean chain of title, and the absence of conflicting agreements, will assure investors that the company owns all of the intellectual property related to the business.

This post provides tips for entrepreneurs seeking to secure the chain of title associated with their intellectual property, thereby helping entrepreneurs to prepare for due diligence evaluation by potential investors.

1.  Secure intellectual property generated by employees and contractors

Startup companies should obtain written agreements from employees and contractors that both formalize the relationship between the parties and provide that all intellectual property generated by the employee/contractor in the course of their work is assigned to the startup.  While intellectual property law (mostly copyright law) grants employers some rights associated with intellectual property created during the course of employment, this is not the case with independent contractors. Rather, the default rule allows independent contractors to retain ownership of intellectual property they create during their engagement with the company.

For example, if a startup company hires an independent contractor to write some code for their new app, the independent contractor would retain the rights to that code unless a written agreement expressly assigns to the startup the intellectual property rights in that code.   Any investor interested in funding the startup would hesitate to invest if the independent contractor retained rights to a critical piece of the app’s code. As such, it is important that entrepreneurs secure written agreements with employers and independent contractors to avoid discouraging potential investors.

Entrepreneurs should also know that written intellectual property assignment agreements need not be limited to just a written assignment of intellectual property generated during the course of work.  These agreements can also include post-termination obligations, such as a requirement to assist the employer with registering the intellectual property or assisting the employer should any lawsuits arise.  These post-termination provisions encourage the former employee to work with the start-up even after leaving the company which can prevent costly hold-ups.

2.  Assigning intellectual property produced by founders to the company

Frequently the founder of a technology start-up company will have generated intellectual property prior to the creation of the start-up.  The rights to that intellectual property, absent a written agreement assigning those rights to another, belong to the founder-inventor.  As such, it is important that the founder assign his rights in any intellectual property generated before the formation of the start-up over to the company. Employment offer letters are usually not used to convey founder’s rights, as they typically only cover intellectual property developed after the employment relationship started.  Therefore, additional documentation is necessary to transfer over founders’ rights.

One way copyrights and patents rights can be transferred is through filing assignment documentation with the USPTO or Copyright Office.  Another way in which founders can convey their intellectual property rights to the company are via the written agreement through which a founder receives their shares in the company.  This approach may be advantageous as it clearly identifies the consideration the founder received in exchange for transferring over pre-existing intellectual property rights to the company.

While this article suggests means by which entrepreneurs can ensure intellectual property assets are assigned to the start-up, it may be helpful to engage qualified intellectual property counsel to ensure your business can meet all of the due diligence requirements of investors.