A startup must safeguard their intellectual property chain of title. (“Chain of title” refers to the sequence of transferred ownership of property, from the present owner back to the first.) To do so, they need to have thorough written agreements with employees and consultants.
This article gives entrepreneurs a guide for documentation and timely action as they prepare for future due diligence exercises with potential customers, partners, investors and buyers.
By default, employment and intellectual property law provides some coverage for intellectual property created by employees in the course of their employment.
Under these circumstances, employers generally own and hold rights over intellectual property. However, startups should follow standard practice and use written agreements that set forth the exact obligations between themselves and their employees and consultants.
Pay special attention to agreements with contractors since the default rule in common law allows contractors to retain any intellectual property they create during their engagement.
Written agreements generally include any contractual assignments of intellectual property broader than those already covered under common law. They also set out any post- termination obligations, such as continuing confidentiality, or a requirement to assist with any intellectual property registrations or lawsuits.
Before an employee starts his or her job, ensure that they sign their employment agreement. This way it is clear that all of the work done by the employee is assigned to the employer. Similarly, when you use a contractor, ensure you have a written agreement with them that assigns you the intellectual property they develop during their engagement.
Founders often present inherent and unique chain-of-title issues. If a founder has done significant developmental work prior to the formal incorporation of your company, you will need to make sure this pre-existing intellectual property is properly transferred to the start-up.
An employment agreement usually will not accomplish this transfer since these agreements typically only cover intellectual property developed after the employment relationship started.
Often the written agreement through which a founder receives his or her founder shares can be used to transfer any pre-existing intellectual property.
This approach will allow a startup to demonstrate it has given value for any pre-existing intellectual property it receives and also provides tangible evidence that any such pre-existing intellectual property has been properly transferred to the company.
This article was produced by James Smith and Shane MacLean and is made available through the generosity of Labarge Weinstein Professional Corporation.