It’s My Startup! But Who Owns the Intellectual Property?
Broadly speaking, a business must own or have a licence for what it makes, uses, sells, distributes or licences. In the absence of this, the business is potentially violating someone else’s intellectual property (IP) rights. IP right violations can trigger costly disputes often resulting in the breaching party having to pay damages, reworking its products or procedures or entering into potentially expensive licensing arrangements with the third party. Further, a failure to secure IP rights can have a material impact on the value of the overall venture.
A common misunderstanding is that where someone is working for your company, the company owns whatever is produced. However, the situation is more complex than this. Subject to any agreement which provides otherwise, broadly speaking, the company will own the IP rights in whatever is produced by its employees (as opposed to contractors or consultants) during the course of their employment. Having said this, very often work is not carried out by employees. This includes:
- When a venture is getting started, work often begins before a formal legal structure (eg – a company) is established. In such a scenario those carrying out the work may not be employees. This commonly includes where the founders started work before a company was officially set up.
- Where contributions are made to a project by consultants or even more casually. Where a consultant (as opposed to an employee) is involved, the consultant would generally retain the IP rights unless there is an agreement to the contrary.
- Where someone has worked on the project but was never an employee of the company (i.e. think of informal arrangements).
- Where open source software is used (noting that this is likely to be the case in almost all new tech plays).
Accordingly, you need to proactively consider who has and who will worked on key aspects which you consider to be owned by or critical to the value of your business.
Where IP rights are retained by thirds parties (including third parties who are now your employees), such third parties should be required to assign their IP rights from to the company (or other formal structure pursuant to which you conduct your business). This is usually done pursuant to a deed of assignment which carefully identifies items being assigned.
Organising assignments of IP rights is usually a straight-forward task. In most cases, “friendly founders” willingly assign their individual IP rights to the company once formed. However, from time-to-time relationships sour making organising assignments problematic. For example, a disgruntled former co-founder who has aspirations to set up a similar venture may seek payment for the assignment of their rights.
Where an assignment is not possible, you may have no choice but to:
- Licence the use what you need, or you will have to stop using it. The terms of the licence will need to be favourable enough for you to consider such an arrangement.
- As drastic as it sounds, consider re-developing those aspects which you do not own. This may feasible if the re-development involves a piece of software code but becomes a material problem if it is a major part of your proposed venture. Our strong advice is that you don’t just sit back and hope the issue will go away. Leaving such issues unresolved could trigger costly disputes and you could even have difficulty in operating your proposed venture or attracting investors and customers.
Here at Allied Legal, we know how to protect a startup from the outset when it comes to securing intellectual property. If you think your startup needs some legal assistance, give us a call on 03 8691 3111, or send us an email at firstname.lastname@example.org.
You might also like our article on Challenges Startups Face.