A reader asks: My co-founder and I are getting some traction on our new site and we’re hoping to raise some money from angels. One issue that has come-up is IP – specifically, the fact that we don’t have any IP documents. Could you lend some guidance?
Answer: For many start-ups (particularly technology companies), intellectual property (IP) is their most valuable asset. Here are the four most common mistakes I’ve seen startups make regarding their IP:
Issues with prior employer(s). Startups need to ensure that none of the founders’ prior employers have any rights to the venture’s IP because a founder was “moonlighting” while previously employed. This is a particular concern if the startup is in the same space as a founder’s prior employer.
If you’re a founder, be sure to carefully review any agreements with your prior employer (everything from offer letters/employment agreements to non-disclosure and inventions assignment agreements to stock options documentation) to determine if there are any provisions that may give the prior employer rights to the IP. (Double check the employee handbook as well.) Also, make sure when you leave your prior employer, you don’t take anything with you (including electronic files, prototypes or customer lists).
IP created pre-incorporation. Many startups fail to correctly assign (in writing) the rights to any IP that was created or acquired prior to the company’s incorporation. Any IP created or acquired by a founder (such as code or a domain name) prior to incorporation is typically assigned to the company as part of the founder’s restricted stock purchase agreement or subscription agreement. The IP is generally contributed or assigned as full or partial consideration for any issued shares of common stock. A problem arises, however, if one of the founders leaves prior to incorporation and takes his rights to IP along with him.
You also want to watch out for IP created pre-incorporation by outside developers or consultants (non-founders), particularly if that party is located outside of the United States. That type of IP often never gets assigned to the company at all – either because there was no written agreement or because the company (which didn’t exist at the time) was not a party to the agreement.
IP created post-incorporation. Once the company has been formed, the IP needs to be protected. A good way to do this is requiring founders, employees and consultants to execute confidential information and invention assignment agreements. Unfortunately, a lot of startups don’t require this – and later run into significant problems with respect to IP ownership.
These problems usually come up during an angel or VC financing round, when the investors are unable to establish a clear chain of title to the startup’s IP as part of their legal due diligence investigation.
Trademark issues. Too many companies, deliberately or accidentally, infringe on another company’s trademark or brand name, putting their IP at risk as a result.
Just because a startup is able to register a certain domain name (or a corporate name in the State of its incorporation) doesn’t mean that it has the right to use a particular trademark. This is a common misconception.
Indeed, in order to have the legal right to use a trademark, a company must either be the first to use the mark in interstate commerce or be the first to register the mark with the U.S. Patent and Trademark Office (USPTO), whichever comes first.
It’s important that startups, at a minimum, do a search on the USPTO site and a web search on Google (and retain legal counsel if they can afford it) to determine whether their use of a particular word or name will infringe on another company’s trademark.
Startup owners: Got a legal question about your business? Submit it in the comments below or email Scott directly. It could end up in an upcoming “Ask the Attorney” column.
Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs. Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.