What-Founders-Need-to-Know-about-Business-Contracts-and-IP-Mistakes

What Founders Need to Know about Business Contracts & Common Intellectual Property Mistakes

March 2024
Author: Andrew (Drew) Piunti
DPA Law PC
drew@dpalawyers.com

First time startup founders often overlook key intellectual property concepts and provisions in their business contracts and service provider relationships.  This is particularly true for those who self-incorporate through LegalZoom or similar sites.  While bad consequences from such missteps can often be remedied after the fact by a knowledgeable corporate attorney, this is not always the case.  And, sometimes, where clean-up is possible, it presents a material diversion of time, energy, and resources.

From what I see when startups and small businesses come to us after self-incorporating, there are four recurring primary intellectual property contracting mistakes:

  • Failing to Transfer IP From Founders To The Company: When a project idea progresses from informal discussions among the core group toward something more tangible, like a written high level strategic business or development plan, it’s time for founders to formally transfer ownership of that plan and all associated IP from themselves, individually, to the company. This helps ensure that the key IP is properly assigned by the founders to the company to minimize conflict later about who owns what should a founder drop-out and leave. It is customary that each founder in fact assign all project IP rights to the company as full or partial consideration in exchange for his or her founder’s shares.
  • Using Former Or Present Employer’s Resources: If you, as an early startup founder or contributor, are still working elsewhere while working on your startup, it is critical that you not use your employer’s laptop, email, technology, or other resources for your startup work – or work on your startup on company time, regardless of whether you are on lunch break or not. In California, and like most states, founders who use their employer’s time, equipment, resources, or facilities to work on a side project run the risk of clouding ownership to the side-project’s IP.
  • Compromising IP Ownership in Works Developed by Unpaid Early Contributors: Startup founders are sometimes unaware of the importance of having a written agreement with a so-called work-for-hire provision under US copyright law. This provision assigns to the startup ownership of the work product and associated IP created by an independent contractor – basically anyone other than a paid employee. Because the exact role of early contributors is often uncertain (sometimes with ‘friends’ making early contributions), a formal written agreement between the start-up and early contributors often, and understandably, goes unaddressed. In this circumstance, however, while the startup might receive a copy of the technology delivered by the unpaid contributor, it receives no ownership interest to its underlying IP rights, other than so called-shop rights – a license to use the technology, with ownership residing with the developer.

This is a primary reason why it’s important that all technology contributors — particularly at the early startup stage when virtually no-one is a paid employee, have a signed independent contractor agreement with (i) properly drafted statements that the work performed and work product generated are on a ‘work-for-hire’ basis, with ownership of the work product and its IP held by the startup, and (2) a present assignment from the developer to the startup of ownership of the IP and work product created (and to be created).  A well-drafted agreement also includes in-term and post-term confidentiality stipulations, and covenants by the developer that all contributions will reflect their original work and will not incorporate IP belonging to third parties without the startup’s written consent.

  • Compromising IP Ownership in Works Developed by Paid Independent Contractors: Beyond compromised IP ownership arising from unpaid early contributors, I see circumstances where the startup has hired a third party developer by signing the developer’s form of service agreement without first having it reviewed by competent counsel. The first time founders, knowing what the know but not what they don’t, might conclude the business terms are as discussed and the developer’s paper as presented otherwise seems reasonable. But the startup’s IP ownership may be compromised from the outset if the developer’s agreement lacks necessary work-for-hire covenants (including a present assignment of ownership of the work-product to be created with associated IP rights), or purports to condition any assignment upon the developer “being paid in full.”  Having every intention of paying, this later condition may seem reasonable. But it in fact casts  an unnecessary cloud over the startup’s technology and IP ownership, one which the founders may not recognize is there until (1) there is a falling out with the developer and the developer refuses to sign an acknowledgement of assignment of ownership – or, at least not until inflated amounts claimed due are paid, or (2) the founders receive push back from VCs during their pre-investment IP due diligence about insufficient of evidence of IP ownership.

As mentioned above, the bad consequences from these common first time founder missteps can often be cleaned up after the fact by corporate counsel (like DPA Law PC). However, it is less risky and avoids a waste of your time and resources to hire counsel at the outset who can provide a template inbound work-for-hire agreement for use with all independent contractor service providers.  When DPA Law PC incorporates an entity, we provide this template within the fixed fee incorporation service.