For Early Stage Start-Ups, Who Owns the IP?

From Ken Maready:

Assignment of intellectual property to a startup needs to be an early step. As an attorney working with technology startups, I find it is best if I can meet with founders during the early conceptual stages, long before they organize their companies, as there are some early legal and business issues that can potentially cause missteps, even failures.  Although typically simple to address early, they can be very costly, if not impossible, to fix later on.  One of the earliest concerns is corralling and protecting a new venture’s core intellectual property.

When a group of founders first incorporate a company, it is common for them to assume that the ideas, concepts and technology (the "intellectual property") they’ve discussed among themselves will automatically belong to the company.  But it is helpful to remember that the company is its own separate entity apart from the founders and the company doesn’t own anything until someone assigns or licenses to it, usually by written contract.
 
It is important to get each founder to sign an assignment of intellectual property to the company as early as possible, typically in connection with the initial issuance of their stock.  This assignment will state that the company owns the ideas the founders have previously conceived or developed which are related to the technology or business practices on which the company is based.  This is in addition to any in-licenses from a university or other institution in which technology has been developed. 

And remember that the founders might not own everything they believe they own – IP developed, even in part, during the course of employment for someone else (or using their previous employer’s equipment or facilities) might give the previous employer a claim to a company's IP, something that needs to be planned around.

Not only will these steps help ensure that the company owns the technology the founders think that it owns, it will also help prevent a co-founder from "taking his or her ideas elsewhere" – at least as far as this technology is concerned.  

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Ken Maready heads Venture Counsel, a law firm for entrepreneurs.  Venture Counsel is located at the Virginia Tech Corporate Research Center in Blacksburg, Virginia.  He writes the Venture Counsel blog and can be followed on Twitter, @venturecounsel

Ken Maready's chapter, "Legal Concerns for the Web 2.0 Business," was accepted for inclusion in volume one of the new series, Enterprise 2.0: How Technology, E-Commerce, and Web 2.0 Are Transforming Business Virtually, by Tracy Tuten, Ph.D.  The Enterprise 2.0 series is scheduled for publication by Praeger Publishers, an imprint of Houghton Mifflin Company.

Added 3/22/10:  Ken Maready has joined Hutchison Law Group.

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Comments

  1. Ken, is the type of agreement that existed between John Lennon and Paul McCartney that all songs written by either of them released under the Beatles label would be penned “words and music by John Lennon and Paul McCartney” regardless of who actually wrote or composed their songs an example of what you’ve described above? Did their IP belong to the Beatles as a company?
    -Kelly

  2. Thanks for the good comments, Ken.

    IP rights can get complicated quickly- especially when entrepreneurs are employed by another entity…

    A little planning on the front-end can save a lot of problems later.

    Also if IP rights need to be licensed, please use a licensing professional (www.usa-canada.les.org/).

    cheers,
    Sam

  3. Ken Maready says:

    Yes and no – that’s a great question, Kelly. I don’t know the specifics of the McCartney/Lennon arrangement, but would guess that the actual copyright (the actual IP) for the song was somehow assigned to the record label, and what McCartney and Lennon split is the royalties (rights to money) that were agreed upon to come back from the record company to either the songwriters themselves directly or to a company formed by the Beatles (with a portion then flowing to the songwriters).

    Although this is different than many startups – where a founder doesn’t typically retain royalty rights from specific IP, but rather gets shares in the company – you could compare it loosely to a university spinout, where the IP developed by a professor is pre-assigned to the university (under the IP policy) and then the university’s tech transfer office negotiates a license to a startup. As part of that deal, the university will usually keep a right to certain royalties, and under the IP policy, a part of those royalties flow back to the inventing professor. Separately, many times the inventing professor will also receive shares or options in the startup for being an advisor or part of management (which I would guess is similar to McCartney & Lennon having their individual royalty rights as well as owning shares in the Beatles’ company ‘Apple’).

    So although I don’t know the specific arrangement for John & Paul, this provides a good way to explore how IP and royalties are sometimes split and shared.

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