The Best Times To Get A Grip On Your Startup’s IP

• 10.27.2015
• Gary Schall

NOTE: This article by Gary Schall and John Hobgood originally appeared on TechCrunch.com on August 31, 2015.

What’s a tech startup’s most valuable asset? It’s not the seed money. It’s not the workspace. And it’s definitely not the espresso machine or Ping Pong table.

The priceless heart of a promising startup is its intellectual property (IP)—the disruptive idea, the brilliant invention, the genius breakthrough. This hot commodity needs to be protected by patents, copyrights and/or trademarks, but these aren’t enough.

Without some additional safeguards in place, IP can be fiendishly fickle, walking off with a disgruntled departing founder or triggering disputes that can send a promising business into a death spiral.

To best protect your startup’s most precious asset, it’s critical to have all founders, employees and anyone involved in creating the idea sign over their intellectual property rights to the startup itself. The right time to do this is always “now”—the worst time is always “later.” But if you need some encouragement to inspire you to take action, here are some other times that make good sense.

When New Hires Come On Board

Have new hires ink an agreement with a “present assignment” clause that assigns everything they invent or create, whether it’s patentable or not, to the company, effective on their date of hire. Make sure the agreement includes a “further assurances” clause, in which the employee agrees to cooperate in the future, if needed, to assist with showing that the startup owns the IP. To top it off, the agreement should include confidentiality obligations, permitting them to use or reveal confidential information only for the startup’s benefit.

To make a contract valid, you must give something to the other party in exchange for a signature. Equity is fine, but it’s not essential, and the payment doesn’t have to be large. The classic example cited in law school contracts classes is a peppercorn.

When The Founders Get Serious

You’ve just incorporated and the team is enthusiastic and motivated. This is the ideal time to have everyone assign IP rights to the company and document who’s come up with which business concepts. If you have better things to do, repeat these three little words: The Winklevoss twins. Remember the $65 million settlement paid to Mark Zuckerberg’s former Harvard classmates to settle a dispute over who came up with the idea for Facebook? Enough said.

When You Think You’ll Be Firing Someone

You’ll know when things turn sour before the employee suspects they are on the chopping block. If they have never completed paperwork assigning IP rights to the company, have them do it before you begin the termination process. Otherwise, they may flat-out refuse, or embroil the company in costly negotiations and make oppressive demands.

We watched a client hit a snag when it wanted to lay off a number of its workers. Because the client had been spun-off from another company, some long-time employees had never been asked to assign their IP rights to the new company. The founders took our advice and delayed announcing their reduction in force until every employee had an assignment on file.

Before A Founder Disappears

We thought it would be pretty unlikely that a founder would walk away from a promising venture to backpack through South America or surf in Fiji. But we’ve seen it happen. A startup contacted us after its CTO went AWOL. The guy had relocated to Indonesia without signing over his IP rights. The other founders wanted to know if this was a problem. It is. That missing signature can throw a wrench in closing on a financing.

Fortunately, the company’s CEO was able to track down the CTO through social connections—but not everyone is so lucky. In the end, the CTO was happy to sign the paperwork, but the founders certainly had some stressful weeks until then.

When Seeking A Patent

When filing a patent application with the United States Patent and Trademark Office, have every inventor assign all rights to the invention and any and all resulting patent applications to the company. This assignment becomes a matter of public record, so it’s easy to see whether the company owns the rights to its intellectual property. Failure to do this is a red flag for investors, who will check to make sure it has been done.

We don’t want to stereotype, but we’ve found that it’s often the tech guys who are more hesitant than the business guys about signing over their IP rights to the company. We’ve been in several meetings with founders where the hard-core tech person balks. We say, “How important is owning the IP to you? If it’s critical, maybe you shouldn’t go into business together.” There’s nothing wrong with that decision; honestly, it’s better to know early on where you stand than to watch VCs reject your request for funding.

We’ve worked with several groups of founders who opted to let their tech whiz hold onto the IP he’d created and grow organically and slowly rather than pursue outside money. That’s not for everyone, but for some teams, it’s the right way to go.

If the tech whiz relents and agrees to assign, remember that an assignment is a contract, so you have to give some something in exchange. While employment alone is often enough, if a founder wants extra insurance, the company can pay—it doesn’t have to be much. A cancelled check and an inked set of documents are belt and suspenders—irrefutable evidence—that the startup holds all the IP rights it needs to move forward.

Before You Need VC Dollars

True story: A startup we know watched helplessly as a $5 million Series A round of financing slipped through its fingers because a key founder hadn’t signed over his IP rights to the company. Sure, he was willing to do it—in exchange for a sizable payment. The VCs smelled trouble, and they walked. That was the beginning of the young company’s demise. For exactly this reason, investors often make funding contingent on having all rights to IP signed over to the company.

Another set of founders of a medical device company knew they needed to get their IP house in order, but—as is often the case with startups—other pressing needs took priority. We encouraged them to gather the necessary signatures, and they assured us they’d get on it. That was two years ago; let’s just say they’re still looking for funding.

You don’t ever want to have to tell your board of directors, “Our key inventor left a month ago, and those patents we thought were assigned to the company, well, they weren’t.” If you have a rigorous process in place from Day One to protect your vital intellectual property, you’re making it easy for investors to give you money.