We all know the success stories of tech companies that started in a basement or a garage. Just like Apple and Microsoft, if you are an innovative tech startup making software or hardware, your intellectual property (IP) is your most valuable asset. You most likely started with an idea which has been developed into a minimum viable product (MVP). Once you have an MVP, you have tentatively developed your IP. But then the question is who owns that IP?
First Essential Step
Depending on the nature of what you’ve built, either the MVP itself (i.e., its design or structure) or the process of putting together the MVP is protectable IP. This is a good time for you (and your co-founder(s)) to discuss the following questions:
- Do you plan on building the MVP into additional uses that may have market demand?
- Who will own the business, or, in the case of two or more co-founders, who will own how much of the business?
If the answer to question (a) is yes, and you have determined the answer to question (b) (or you need legal advice on this), you must quickly connect with your attorney, incorporate your company, and set up the ownership structure.
Second Essential Step
Once incorporated, your IP rights must be transferred in favor of the company. This applies even if you are the sole founder of the business. Here are three significant reasons why assignment of your IP is critical.
- To Prevent Future Disputes
If your IP is not assigned to the company, the exit of a co-founder can threaten the future of your business. The last thing you want is for a departing co-founder to take valuable IP away with them (or make a claim on the ground that the IP was jointly developed). Not only would this diminish the value of your business, you would have a potential competitor with similar or identical IP. Moreover, an attempt to resolve the ownership issue with the departing co-founder might involve you in an expensive court battle.
- To Raise Capital
Angel and seed investors might invest without digging very deep into the ownership of your assets. However, with VCs or larger investors, they will conduct due diligence to ensure that the company has ownership of the IP and not the co-founders individually. If your company does not own the IP, then the value of your business in dollar terms that an investor perceives may be significantly lower. Moreover, the investor may choose to invest only if you take steps to first alleviate their concern over the IP ownership.
- To Sell Your Business
Any potential buyer will want to confirm that your company actually owns the IP that is critical to your business. If the IP was never assigned to your company, the buyer would end up owning tangible assets but have no rights over the actual product or service that is being sold. For this reason, a buyer would not want to buy your business.
How to Transfer Your IP to the Company
You can transfer the ownership of your IP to your company by way of an IP assignment agreement. The agreement should assign all past IP you’ve developed so far, as well as automatically assign any future IP developed after signing the agreement. This ensures that, at any given point in time, the IP is owned by the company. Having taken these steps, it is improbable that a co-founder leaving the company can win a legal battle over ownership of the IP.
Key Takeaways
Formally assigning founder IP to your company is an important step for your future success. If the company is not the legal owner of the valuable founder IP, complicated disputes if a co-founder departs can occur. In addition, potential investors and acquirers may be turned away.