Startup entrepreneurs are rightfully concerned about intellectual property. A lot of the focus is on questions like: How do I obtain a patent? Or is my software protectable by copyright? These are important questions.
However, securing these rights does not help the company if the company does not own the rights. If someone files a patent application, and the patent office grants the patent, that sounds like great news, right? But it does not help the company – and can even harm the company – if the company does not actually own the patent. If the founders work on a technology, then create a startup company, but do not assign their rights in the technology and intellectual property to the company, the company may not own the rights. Then if one or more of the founders leaves, the company may not own the technology or the intellectual property rights in the technology.
If the company does not own these patents, copyrights or other intellectual property, then the company’s products or its licenses do not include these rights. If it does not own the rights, the company can’t enforce the rights against third-party infringers. The company itself may even be an infringer of the intellectual property rights that it thought it owned!
Founders’ Intellectual Property Assignment/Contribution
Key to securing rights in the company is executing an agreement or agreements with the contributors. Founders may already have intellectual property rights before they start the company. For example, one or more of the founders may have developed software, conceived of inventions or even filed patent applications. How do these rights get into the company? Typically the rights are assigned to the company in the form of a founder intellectual property assignment agreement. This founder intellectual property assignment agreement is usually connected to the founder’s stock purchase or contribution agreement (the agreement under which the founders receive their “founders’ stock”). In this way, a founder will usually assign his or her intellectual property rights in exchange for the issuance of their initial founder’s stock in the company.
Assigning intellectual property and other assets to a company can have tax implications, so the company should consult with its tax advisor before completing the assignment.
Employee Proprietary Information and Invention Assignment Agreements
In addition to the founders, the startup will hire employees, and it will be important for the startup to own the intellectual property created by these employees. This is done typically through employee proprietary information and invention assignment agreements (PIIAAs). These agreements assign the inventions made by the employee in the course of employment with the company. These agreements are signed by employees as they start at the company.
Even the founders will need to sign PIIAAs to cover their contributions made as the founders continue to work at the company (in addition to signing the assignment agreement discussed above for their pre-existing intellectual property rights).
It is important to use a properly drafted PIIAA. If not properly drafted, the PIIAA may not effectively assign the right to the company, meaning that the company may not own what it thought it owned. Additionally, your state may have special requirements for the form. For example, California state law requires particular language to inform employees of their rights regarding inventions made outside the scope of employment (California Labor Code section 2870).
Obtaining these rights is not just theoretical. There can be real infringement and enforcement issues if the company does not own its rights. Also, it is important to have the rights properly documented if the company anticipates a sale or other form of “exit” for the founders in the future. The acquirer will want to know that the company owns its intellectual property rights. This means that in the acquirer’s due diligence, it will want to see copies of the company’s intellectual property agreements from founders, and PIIAAs from employees. So the time investment in securing these documents now can be well worth the “cost” later.