Why Investors Require IP Assignments from Founders
One of the first requests that investors make before investing in a company is that the founders (and all key employees) execute written intellectual property assignment agreements. These agreements make it so any intellectual property that is created by the founder for the company will be owned by the company, not the founder individually. Generally, this request does not lead to much tension or pushback from the founders. Still, understanding the reason for IP assignments is important when negotiating your rights as a founder of the company.
Why Investors are Concerned About IP Assignments
Two founders, John and Jane, develop a new software application. John has significant experience in business development, branding, and sales, while Jane is a senior-level software developer. As they are working on the beta-version of the app, John and Jane begin talking with an investor friend, Joe, about the opportunity to invest in the company. Joe is excited and decides to invest $100,000 to help finance the company’s launch of its beta-version app. Shortly after Joe invests, John and Jane have a falling out and Jane decides to leave the company. Jane decides to take the code she has developed for the app and launch virtually the same application for a new company. John is left having to find a new developer, and Joe is upset because most of the value of the company was tied up in the IP that Jane developed. Because Jane did not assign her rights to the IP she developed for the company, neither John nor Joe have the ability to stop Jane from creating a competing product. Further, Jane can restrict John’s ability to use the IP she developed, because she owns the rights to the IP. Joe should have requested that John and Jane execute an IP assignment agreement—and put each founder on a vesting schedule to incentivize continued employment with the company.
Had Joe requested that both John and Jane assign all IP that was developed for the company to the company, then Jane would not be able to freely use the IP in a separate venture. If Jane did, the company could sue to enjoin her use of the company’s IP. Further, the value of the IP would not disappear when Jane left the company, because the company retains ownership of the IP after the founder leaves. While there’s value tied into a particular founder, there’s generally much more value tied into the IP that the founder created.
Defining Intellectual Property in the Agreement
Most entrepreneurs will want to limit the definition of IP In the assignment to only IP that is specifically created for the company, using company equipment, and during normal business hours; however, most investors will want the assignment to be as broad as possible. This may create tension in the negotiation process.
In Washington, an IP assignment is void as to IP that is created without the company’s equipment, supplies, facilities, or trade secret information, unless the IP relates directly to the company, the company actually anticipated such research and development, or the IP results from work done by the employee for the employer. In other words, the employee owns IP that is developed independent of their relationship with the employer.
Whether you’re a founder of a startup or looking to invest in a startup, it’s important to understand the importance of IP assignment agreements and how they can impact a startup company and its founders. If you’d like to learn more about drafting an IP assignment agreement for your company or other considerations when preparing to invest (or take on investment) in a startup company, please contact us today to schedule your free initial consultation.