A business concept and sometimes a working prototype, is typically created prior to the establishment of any formal business entity. Quickly developing a concept usually trumps any formal planning or business discussions. Skipping the business formalities can cause substantial problems that can ruin friendships. The solution to most problems between founders is to reach an agreement before the item ever becomes a problem. There are several documents that founders should consider as they progress through the life cycle of a startup including, (1) transfer and assignment of intellectual property; (2) buy-sell agreement; (3) employment agreement; and (4) stock-based compensation arrangements. These documents can overlap or stand alone. This blog will briefly address the concept of a transfer and assignment of intellectual property.
The World Intellectual Property Organization defines “intellectual property” as “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.” In a general startup context, intellectual property can include such things as source code, logo, name of the company, and content for the application or website. The ability to protect certain intellectual property through patent, trademark or copyright laws, will often greatly enhances the value of a startup.
A startup moving from concept into infancy will have developed some form of intellectual property during the transition. The ownership of the intellectual property can become a hotly contested issue in the event the founders separate or the intellectual property becomes something of value. One possible solution is to have the individual who created the intellectual property transfer and assign his or her rights of the intellectual property to the newly formed startup company. The creator could also license the intellectual property to the startup for any given period of time, such as one month increments or perpetually while still maintaining ownership over the intellectual property.
A transfer and assignment of intellectual property typically requires the transferor to make representations that the intellectual property is not infringing on a third-party’s ownership rights. This warranty is usually accompanied by an indemnification clause, which provides that the transferor will defend the startup company in the event a third-party files a lawsuit claiming their intellectual property has or is being infringed. Ultimately, the transferor should disclose any licensing agreements incorporated into the intellectual property that could affect the startup company. For a simple example, the source code for a computer alarm is intellectual property owned by John. Frank develops a clock that incorporates the alarm source code. Frank must license the alarm source code intellectual property from John. Frank would be required to disclose the licensing agreement incorporated into Frank’s own intellectual property.
The intellectual property developed in the early stages of a startup is likely to be the core foundation for that startup. Without the intellectual property, the startup might not have anything of value and might fail. The goal is for the founders to mutually agree on the long-term future of the business by executing an assignment and transfer of intellectual property or perpetual licensing agreement to the startup. These early stage agreements will help protect the longevity of the startup.
