Pete Tormey’s ebook “Startup Guide to Intellectual Property: Early Stage Protection of IP” is a great resource for founders on startup intellectual property. This blog post includes excerpts from the “Protecting IP Early” Chapter of Pete’s book. They cover some of the basic concepts of intellectual property and how to protect it early in your startup’s existence.
In the Beginning Was the Doodle: Defining Startup Intellectual Property
The following is a condensation of key points in “Protecting IP Early” chapter of Pete Tormey’s “Startup Guide to Intellectual Property: Early Stage Protection of IP” that relate to clearly defining who owns you startup intellectual property.
In the Beginning was the Doodle
The proverbial startup originates on a napkin over cocktails or a coffee. Some startups are well planned and highly orchestrated; others just seem to happen. But even the most experienced entrepreneurs often neglect their intellectual property; not that they don’t think about it, but they are not all that clear about who really owns what, and ultimately, how much that what is worth. In business, what you do not know can hurt you, and what you do know can make you rich. Just like real estate, intellectual property needs to be clearly defined, and its ownership firmly established.
Who Really Owns Your Startup Intellectual Property?
Just like real estate, your startup intellectual property needs to be clearly defined, and its ownership firmly established. Next to equity ownership, intellectual property ownership is often overlooked or deferred in a young company. Startups often assume the company will own it all, but sometimes things go bad quickly and ownership can become a legal issue. The question of “who really owns the startup intellectual property?” might sound like a really basic question, but oftentimes it’s hard to answer. If there are joint developers, or multiple stakeholders with valid claims of ownership, then things can get messy.
Many ideas can be developed before the business a startup is actually created. The key here is to understand who is “on the bus” and make sure that they assign the intellectual property once they are on board. For discussions that take place prior to formation this can be tricky and my rule of thumb is to assume that ownership is held jointly by all parties to the discussion unless you are paying them and explicitly ask them to assign the IP. More on this below.
Work-for-Hire is the legal default is if you pay someone to develop something for you, then you own it. For example, if you hire someone to produce an invention you thought of, or to make some marketing posters that might be copyrightable, and you paid them to develop these things for you, then you own the rights in the intellectual property they made. If a work is “made for hire,” the employer–not the employee–is considered the legal author. However, if there is nothing in writing, disputes can and will arise. These can be costly and derail a startup business, so it’s best not to rely on work-for-hire in the abstract unless you need to. It’s better to be absolutely clear on which rights you are paying for in a written agreement.
Outside Experts paid by you to write software for your business may use code, procedures, and subroutines that they have developed and used before they started working for you. They may also use development tools that limit their ability to pass on rights to that software. Very often industrial artisans, like graphic designers and web developers, use pre-existing art to create solutions and clarity of ownership is important. Whatever is developed for the company should belong to the company.
Once you are incorporated you should make sure that you ask that all rights are assigned to the company. An exception to this can be for preexisting support packages that a development organization had that were used to cut development time and for which they include the right to distribute the source as part of your product. Note that this is different from incorporating open source which can present different complexities.
Get it in Writing: even the dullest ink shines brighter than the brightest memory. Have a signed contract in which an employee or vendor agrees to transfer their rights to you in exchange for their employment. Intellectual property ownership then becomes a permanent non-issue, assuming you keep your part of the agreement by paying them. There is no good substitute for having a well-written agreement among yourselves as to who actually owns the startup intellectual property that you’re having developed. Even if it seems a little awkward among friends, you need to say, “Okay, who owns this? Who invented this, or what are we going to do with it?” You hate to ask that question and risk ruining what could be the start of a really good relationship, but it needs to happen, and the sooner the better.
Consider Email: as much as I recommend a well-written agreement, if you can’t get one, at least make an email record of what you agreed to do. Here’s how it works. “Thanks for meeting with me today, just to be clear I will do… and you will do…” A series of short emails setting out what you agreed upon and what your expectations are can be very effective in settling disputes that arise later. They might not have all the formalities of a written contract, but if your email exchanges have the basics of your agreement, well… that’s better than nothing. Besides, getting in the habit of following up meetings with emails helps keep projects on track and keeps all the players on the same page. The downside to emails is that if there is a disagreement about what was agreed upon, an email might not clarify things. People don’t read emails in depth, so they often cause unwarranted confusion. Meet person-to-person (or by phone), clarify things, and then send a follow up email.
I really like Pete’s practical approach here: get a clear understanding and document it in plain English. Ask them to confirm their understanding or to document what they believe they have agreed to and at least you can iterate. Remember communication is not what is said–or put into writing–but is what the other party understands and agrees to. Confirm there is a shared understanding.
A Simple Agreement is usually better than no agreement at all. And if the company fails, it’s nice to know who gets what. If you start a company, and you try to find investment backing for it, and the investment backing never comes through, who gets the software at the end of the day? The developer? Are you going to split it? Often, if a company is trying to find venture funding or angel funding–and they don’t get it–there’ll be some animosity among the company founders. If personal dynamics change after a failed business venture, you cannot expect people to negotiate with the same spirit that they started the company. It’s nice to know–beforehand—what will happen with the software that’s developed.
Pete Tormey in the “Startup Guide to Intellectual Property: Early Stage Protection of IP“
Again Pete offers practical legal advice for bootstrappers: get started, keep things simple but always strive for clarity and shared understanding.
Related Blog Posts
- In the Beginning was the Doodle: Protecting Startup Secrets
- Podcast with Pete Tormey on Forming a Team, Dividing Equity, and Gaining Early Traction
- Podcast with Pete Tormey: Bootstrapper’s Delegation Checklist
- Legal Advice: Start With a Plain English Agreement That Covers Key Deal Points
- When to Incorporate and Options for IP protection
- Legal Issues: Q&A with Pete Tormey of Action Patents My first conversation with Pete for the blog in 2007 when he was a registered patent agent.