Your Start-Up Will Stall If It Doesn't Own It's IP.
As I’ve emphasized in other writings, the single most important asset of any business is its intellectual property (“IP”). Sure, good management is very important, but executives and other managers can (and do) come and go. A start-up’s IP, like a diamond, should be forever (or at least until it’s sold or transferred). Among other benefits, securing ownership of all your start-up’s IP enhances its value and can block out competitors.
Surprisingly, IP ownership isn’t secured in many start-ups. The steps to have a start-up own its IP aren’t complicated. But they must be taken at the beginning of any collaborations between the start-up’s participants, to avoid what are almost always expensive, contentious fights over its IP, especially when the start-up starts to get traction, gets funding or becomes an acquisition target.
So, why aren’t these steps taken? Well, in the early stages of a start-up, excitement and anticipation abound. There is congeniality and trust. Collaborations to develop ideas and business plans are typically informal. People, often friends and colleagues, sit around, pitch ideas, vet, refine and embellish them, to take them to the next level. Some of these people may stay with the startup. Others may move on to pursue other endeavors.
I understand most start-ups, including those I do and have worked with, are cash-poor at the beginning. Also, the start-up’s entity may not be formed yet. The course it will take and how its IP will develop is fluid.
But, without any formal contracts, or formal entity created to own its IP, any invention, brand, technology, logo, designs, and other creative works generated or derived from these informal collaborations are likely personally owned and controlled by the involved individuals – not the start up. This allows the individuals to freely assign or license their rights in the IP to anyone else, including that start-up’s actual or potential competition. Permission of the other collaborators is rarely, if at all, needed.
Even worse, these collaborators may not own or control their contributions to the start-up. They usually then have day jobs, employed or engaged under contract as independent contractors by third parties while waiting for the start-up to launch and/or receive funding. These engagement and employment contracts (“Prior Contracts”) usually vest in those third parties the ownership from inception of any IP a collaborator creates during the term of a Prior Contract. If so, the collaborators’ contributions intended for the start-up belong to the employer or third-party engaging them under the Prior Contract.
But wait, there’s more (potential trouble). What if you later can’t find a collaborator who left the incubating start-up and from whom you want or need their IP contribution? Another danger of not having signed contracts very early on with creators of your start-up’s IP, is extortion. They may know or hear about funding or acquisition interest in the start-up and demand an exorbitant price or share of the start-up in exchange for assigning their IP contribution to it.
And, every potential investor or acquirer will perform due diligence to make sure that all the start-up’s IP is owned by it. If it isn’t, the startup can pretty much kiss that funding or acquisition possibility goodbye, as well as eviscerate its valuation going forward.
So, how does a start-up prevent the nightmare of discovering it doesn’t own its IP? Here are some suggestions:
1) Have an entity professionally formed for the start-up as soon as possible, so that all IP can be assigned to it or owned by it from inception.
2) Have any Prior Contracts of start-up participants reviewed by an attorney experienced in this area, to determine if the rights to their IP contributions are owned by or have been assigned to the employer or third party that engaged the participant.
3) For IP that’s free and clear of Prior Contracts, have properly written contracts with everyone involved in the potential creation of IP for the start-up, before any IP is created. If that IP has already been created, it needs to be assigned and transferred to the start-up. These contracts need to clearly, effectively, and in compliance with applicable state and Federal law, establish the start-up’s ownership of that IP and restrict how participants can deal with it. This includes effective confidentiality, trade secrets, and non-disclosure provisions in the contracts. These contracts should not just be with individuals, but also third parties the start-up engages to help further develop or implement IP, such as a web or app developer, code writer, graphic artist or business plan author.
(There are also steps that should be taken once the start-up’s IP is secured. These include keeping potential inventions confidential (as public disclosure could bar patentability of the underlying invention), signing non-disclosure agreements with manufacturers and other partners, carefully reading and understanding IP provisions in development contracts, service contracts, inbound licenses, and other contracts and having these and outbound licenses related to the IP carefully and knowledgably drafted and negotiated. Your IP attorney should assist with all this. But these are subjects for another blog).
The takeaway? Unless you want your start-up to slow down or stop altogether, your start-up needs to start out with necessary contracts properly written and signed by all collaborators as soon in the process as possible, and an entity formed to hold its IP.
Paul I. Menes
Entertainment & Digital Media Practice
The Influencer Lawyer ®
(c) 2020 Paul I. Menes