When your startup approaches investors for funding, one of the first questions they will ask you is whether your company owns the key IP assets of the business developed by founders, employees, and contractors. So, do you?
Hopefully “yes.” But if your company’s files reveal a less clear-cut answer, potential investors may not be willing to invest their money and take the risk if the answer might be “no.”
By getting things right in the first place, you can avoid scrambling to clean up problems on the eve of a financing or sale. Here are the three specific questions that you should be prepared to answer:
1. Did the founders assign all of the IP that they developed before the company was formed?
Typically, founders would assign this IP, including rights in business plans, when stock is initially issued to them. If that did not happen, investors will worry about who owns the IP now, what its current value might be, and what the cost and tax consequences of transferring it now will be. If the founders are still with the company then these issues may be manageable, but what if a founder is long gone and no longer friendly?
2. Did others who developed IP before the company was formed assign it to you?
Maybe it was a software developer paid to write code, or a would-be founder who did not join. Or maybe it was a prior employer or university where a founder worked. Without assignments or licenses from these third parties, these other parties might claim ownership of key IP and allege that your company is infringing their rights. Founders themselves often think that the risk is small, but unfortunately investors usually disagree.
3. Have your employees and contractors signed agreements assigning all IP that they develop to your company?
You will be asked to provide copies of the invention assignment agreements with every employee and contractor hired by the company since its formation. The agreements should comply with relevant state laws, be signed in a timely manner with proper consideration, and make clear that no further action is required to complete the assignment.
A handful of states including California and Illinois prohibit employers from requiring employees to assign rights in certain developments made on the employee’s own time and with the employee’s own resources, so the agreements should reflect this. Also, state law may dictate what constitutes adequate consideration for an IP assignment. For example, a recent Illinois case suggests that additional consideration, beyond just at-will employment, may be required to ensure the enforceability of post-termination noncompetition clauses and possibly invention assignment agreements as well.
It sounds simple, but many companies get this wrong.
If you did not get assignments from all of your employees and contractors when they were hired, you may be able to get them from current employees and contractors now. However, it may be too expensive or risky to seek assignments now from former employees and contractors.
Potential investors will decide to invest—or not—based on whether they are comfortable that the company owns or has sufficient rights to the IP in question. Without an assignment, the following default rules will apply:
- Patent Rights in Inventions: State law governs the ownership of inventions. Rules vary by jurisdiction, but generally, without an express assignment, the original inventors—not the company that hired them—would own the patent rights in the underlying invention. Where an employee was hired or directed to invent, you may argue that the employee was implicitly obligated to assign his invention to you. However, that argument would be complicated, expensive to fight about, and best avoided altogether.
- Trade Secrets: Companies often believe—mistakenly—that NDAs and confidentiality clauses in employment agreements offer sufficient protection for the developments and inventions of their employees and contractors. However, these do not typically address who owns the developments and inventions or transfer ownership to your company. Therefore, you need to go a step further to ensure your ownership of the IP through an assignment.
- Copyrights: Employers automatically own copyrights in works developed by their employees within the scope of their employment. However, for contractors’ developments, the opposite is true—absent an express assignment or work-made-for-hire agreement, copyrights in works developed by a contractor would be owned by the contractor rather than your company.
Investors would always prefer that you have good agreements in place rather than having to rely on these default rules.
Don’t let your company get caught with poorly drafted agreements that expose you to risk around these issues. It is far easier—and cheaper!—to get this right in advance of discussions with potential investors rather than trying to fix it later.
About the Author:
Anna Remis is an attorney at Sidley Austin LLP in Chicago and a member of the firm’s corporate group. She concentrates her practice on IP licensing and technology transactions, venture capital investments, and intellectual property aspects of corporate mergers and acquisitions. Ms. Remis has a particular passion for working with entrepreneurs and startups, and advising emerging growth companies and their investors and offers a well-rounded and strategic – yet practical – perspective to her clients. Ms. Remis received her B.A. from The George Washington University and her J.D. from the University of California Berkeley School of Law (Boalt Hall).
The opinions expressed herein are those of the authors and do not necessarily reflect the views of their respective firms, clients, or any affiliates of any of the foregoing. This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.