recommended IP strategies

Intellectual Property Strategies for Startups – Part 3

This third part of the three-part series with respect to Intellectual Property (IP) Strategies for Startups will discuss some recommended IP strategies to protect the startup’s IP. Click the corresponding links here for Part 1 and Part 2.

Part 3. Employ several strategies to protect the IP assets

Consider the following strategies to ensure that the company is the sole owner of its IP assets:

  • Execute IP assignment agreement

IP created or acquired by a founder or co-founder before the incorporation of the startup needs to be assigned to the company through a technology invention assignment agreement right after the corporation is formed. This is typically done as an exchange for the shares of common stock issued to them. Afterwards, as the company hires any employee or independent contractor, the worker needs to sign an employee or consulting assignment agreement that will assign to the company any and all rights and interests in his or her work performed during the course of work or employment.

As indicated in Part 1 and Part 2, a clear chain of title showing that the company owns the IP needs to be clearly established.

Say that a company engaged an independent contractor to develop its technology but did not make the contractor assign his or her rights in the technology to the company. When the time comes where investors are interested in investing in the company, the company begins to realize that the contractor is still the owner of that technology.

In this tricky situation, even if the startup owner were able to locate the contractor and get the rights assigned to the company, it would often come at a steep price. The value of that right might have increased along with the current value of the company.

What if the contractor cannot be located? If the IP directly relates to the core value of the company, it is not uncommon that acquisition or funding could fall apart.

It is imperative for intellectual and property rights/ownership to be communicated as early and as clearly as possible to all employees and independent contractors. Such communication should be applied universally, regardless of whether the worker is a friend or a co-worker. It is always cheaper and cost effective to resolve these types of issues in the beginning rather than dealing with them before the startup is about to go public, has raised funds, or is acquired.

  • Review your employment agreements and other agreements previously entered with another party.

In addition to the general IP ownership and its corresponding exceptions above, it is crucial to ensure no employment obligations are conflicting or jeopardizing the startup’s IP.

For example, an assignment agreement can sometimes provide that the employer owns any employee’s invention or creation that relates to the employer’s business – regardless of whether the employee works on it at his or her premises and without using the employer’s time and resources. Therefore, founders, employees, and contractors of the startup need to review what they have signed with their employer prior to putting their idea to work or joining the startup.

It is also beneficial to document everything carefully and keep records of where ideas come from to help ensure that prior employers do not have any stake in the startup’s invention.

  • Execute non-disclosure agreements

There should not be an exception as to whom the NDA should be executed. It may be hard asking a friend or a family member, who is also a founder, employer, or a contractor of the startup, to sign this type of agreement. However, as discussed in Part 1 of this Intellectual Property Series, this is important to protect any trade secrets, patentable ideas, or other confidential information that the company may have.

  • Review third-party licensing agreement and ensure none of the terms affecting the startup’s IP ownership

Many startups will license technology from a third party as a base to build their technology. For instance, more and more startups develop their technology using open source technology. It is crucial to review the licensing terms of the open source technology and make sure that the startup will own anything developed using that technology. If a company intends to commercialize its technology, avoid using copyleft-style open source programs. Such programs are licensed under the condition that any derivative works from that open source technology will have to become licensed under the same open source license. Thus, it will render the new development open source as well, preventing the company from commercializing that technology.

With a number of legal issues to consider, entrepreneurs should not be discouraged to move forward with their ideas and inventions. Knowing this ahead of time will help founders to be mindful on what to watch out for, to prioritize and to know when the time to engage with a knowledgeable and experienced attorney in the process.

Dream big, dream bold!

Author: Irene Sulaiman, IP & Business Attorney

Disclaimer: This article is made available for informational purposes only and is not intended to provide, and should not be relied on for, legal advice. Please consult your own attorney with respect to any particular issue or problem.

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