If you don’t fully understand whether an individual or the company owns specific intellectual property (IP), then you need to resolve the conclusion as soon as possible. This article discusses the importance of IP ownership for startups. As you’ll see below, much of the value of the company is dependent upon this single question.
Generally, the creator of the IP is the owner. However, when it comes to startups, it’s important for the company to own the IP related to its products, services or operations. This is crucial for continuity, investor attractiveness, licensing and monetization, asset valuation, legal protection, scalability, and growth. To ensure that the IP created by employees or founders is owned by the company, startups use Confidential Information and Invention Assignment Agreements (CIIAA). This article explains more about CIIAAs.
It’s important to work with your legal counsel to assess IP ownership and ensure that the company has proper title. If you’re looking for counsel, feel free to reach out to us here.
The Default Setting
As mentioned above, unless there’s an agreement in place, the creator of the IP is the owner of that IP, whether that creator is a founder, employee, contractor or advisor.
- Creation Is the Key. IP rights don’t generally exist in an idea as such. They exist in a particular expression or implementation of an idea. For example, you can’t copyright an idea for a novel, but you can copyright the actual text of the novel once it’s written. Similarly, you can’t patent an abstract idea, but you can patent a specific, concrete invention that embodies the idea.
- Automatic Rights. In many cases, these rights are automatic. For example, copyright exists automatically from the moment a work is created in a tangible form. There’s no need to register or apply for copyright, although doing so can provide additional benefits.
- Multiple creators. Things can get more complex when there are multiple creators. In general, if two or more people jointly create a work, they will be joint owners of the IP in the work. But the specifics can depend on things like their intention, their respective contributions to the work and the laws of the relevant jurisdiction.
IP laws can vary significantly from one country to another. For example, some countries recognize “moral rights” (such as the right to be acknowledged as the author of a work), which can’t be transferred and remain with the creator even if the economic rights are transferred.
Remember, these are general principles and the specifics can depend on a lot of factors. If you’re dealing with a situation where these issues are relevant, it’s a good idea to get legal advice.
Startups Must Own the IP
There are several reasons why it’s important for a startup, rather than an individual, to own the IP related to the company’s products, services or operations:
- Continuity and Stability. If a startup’s IP is owned by the company, it stays with the company even if individual employees or founders leave. This protects the company’s ability to continue using and developing its products and services, and provides stability for the company’s operations.
- Investor Attractiveness. In most cases, the core valuable assets of a startup are IPs, not plants, products or other tangible assets. Therefore, it is incredibly important that the company owns any IP related to its business and can fully exploit it. Investors generally will not invest in a company where individuals own the IP or where there is ambiguity of ownership. Without the IP, many startups simply have no value.
- Licensing and Monetization: If the company owns the IP, it has the flexibility to license it, sell it, use it as collateral for a loan or otherwise monetize it as it sees fit. This wouldn’t be possible if an individual employee or founder owned the IP.
- Asset Valuation: The IP is a key asset for many startups. If the startup owns its IP, that adds to the total assets of the company, increasing its valuation.
- Legal Protection: If the company owns the IP, it has standing to sue for infringement of that IP. This could be crucial if a competitor copies the company’s products or services.
- Scalability and Growth: As the startup grows, the IP and knowledge related to it should be shared and used throughout the company to maintain consistency, quality and efficiency. If the IP is owned by an individual, it can hinder the ability of the startup to scale up its operations.
For these reasons, startups generally use legal agreements such as a Confidential Information and Invention Assignment Agreements (CIIAA) to ensure that the IP created by employees or founders in the course of their work for the company is owned by the company, not by the individuals.
Founders and Employees — CIIAA
A CIIAA is a crucial agreement that ensures that founders and employees are transferring ownership of the IP to the company. This agreement serves two main purposes:
- Confidentiality. It protects the company’s proprietary and confidential information. Employees or founders who sign this agreement are generally required to keep the company’s confidential information secret and to use it only for the benefit of the company.
- Assignment of Inventions. This agreement assigns to the company the rights to any inventions, ideas or IP that the creator develops, as long as they are related to the company’s business or demonstrably anticipated research and development, or result from any work performed for the company.
Why is it essential for a startup?
- Protecting Valuable Assets. For many startups, their main assets are their ideas, inventions and confidential information. A CIIAA helps to ensure that these valuable assets belong to the company, not to any individual employee or founder.
- Preventing future disputes. It also helps to prevent disputes down the line about who owns a particular piece of IP. Disputes can often arise when there are multiple contributors or if an employee or founder leaves the company and later tries to use the IP, the company can point to the CIIAA as evidence that the IP belongs to the company, not the individual.
- Investor Expectations. From an investor’s perspective, they will want to ensure that all of the startup’s key IP is owned by the company. If the startup doesn’t have clear ownership of its IP, this can be a major red flag and could potentially scare off investors.
- Employee Mobility. In sectors with high employee mobility, a CIIAA is an important tool for ensuring that the knowledge and ideas developed within the company don’t simply walk out the door with a departing employee.
It’s important to ensure that these agreements are properly drafted and enforceable, and they should be reviewed by a lawyer. They need to strike a balance between protecting the company’s interests and being fair to the employee or contractor, and they also need to comply with relevant laws, which can vary by jurisdiction. If you’re looking for counsel, feel free to reach out to us here. If you’d like to learn more about the CIIAA, click here.
Contractors and Advisors — Independent Contractor Agreement
Though it’s essential to ensure that the startup owns anything created by contractors and advisors, they generally don’t sign CIIAAs. Instead their agreements — Independent Contractor Agreement for Contractors and Advisor Agreement for Advisors — should have provisions both for confidentiality and invention assignment.
Consequences of Not Assigning the IP
Not assigning the IP to the company can have serious legal consequences for a company. Without this agreement, employees may have the right to claim ownership of their inventions, even if they were created during their employment and using company resources.
This lack of clarity around IP ownership can lead to costly legal battles over ownership, which can damage a company’s reputation and affect its bottom line. Additionally, if an employee leaves the company and takes their inventions with them, it could result in lost revenue and missed opportunities for the business.
Furthermore, without an invention assignment agreement, there may be confusion over what types of IPs are covered by the agreement. This can create uncertainty around who owns certain creations or ideas and create disputes that could have been avoided with a clear agreement in place.
Not having an invention assignment agreement is a risk that no business should take lightly. By proactively creating this type of agreement, companies can protect themselves from potential legal issues down the line and ensure that they maintain control over their most valuable assets
In conclusion, the IP is a crucial asset for many startups, and it’s essential that the company owns its IP rather than any individual employee or founder. To ensure this, startups use CIIAAs to assign ownership of any IPs to the company. Such agreements are essential for protecting valuable assets, preventing future disputes, meeting investor expectations and ensuring employee mobility. Not having a CIIAA is a risk that no business should take lightly, as it can lead to costly legal battles and lost revenue. By proactively creating this type of agreement, companies can protect themselves from potential legal issues down the line and ensure that they maintain control over their most valuable assets.
