Mistake #3: Failing to Adequately Protect Your Intellectual Property

This is the third in a series of posts on common costly legal mistakes made by founders of early-stage companies. If you missed them, read Mistake #1 and Mistake #2.

From Former Employers

Entrepreneurs often mistakenly assume that they possess all legal rights to an idea because they came up with the idea. If the founder developed the IP while employed by another company, that former employer may have ownership rights to it. The founder may have signed an assignment of inventions agreement with the former employer. Even in the absence of an agreement, if the idea was conceived of during the course of the founder’s employment, the former employer may have rights to the idea.

So if you or any other founder were performing services for another entity while also helping to develop the idea you are now looking to commercialize, be sure to review all of the agreements that founder signed with that other entity.

If you think there’s a problem, don’t ignore it! Guess when that other entity will come knocking on your door to claim its rights? Right before or after you announce the gigantic first round of funding. That’s a company killer!

From Co-collaborators

Similarly, if a founder formulated the idea with another person or entity, that third party may have ownership rights to the idea. Any co-collaborators should sign an agreement with the new company in which they assign their rights to the idea to the company.

From Consultants and Employees

Another mistake often occurs when entrepreneurs hire third parties to create IP, such as software code. Founders sometimes assume that since the consultant was specifically hired to develop the IP for the company, the company owns all legal rights to the finished product. Again—not true. All consultants should sign an agreement affirmatively assigning their IP rights to the company. The company should also require the same from all employees.

From Yourself

Founders often do not realize that their individual ownership of an idea is not equivalent to corporate ownership of the idea. Every founder should sign an agreement with the company assigning their rights to the idea to the company. Entrepreneurs also often assume that licensing their IP to the company will suffice. Wrong. Investors typically will not invest in a company if the founders retain any personal rights to the IP.

Mistake #4 coming up tomorrow...