Securing the Company’s IP and Confidential Information
In the excitement of the “idea” phase of a startup’s life, it is easy for its founders to forget that the company’s only real asset at that time is its intellectual property (“IP”). Together with the value of the founder team itself, the startup’s IP is the so-called “secret sauce” of the venture and it’s only worth something if it is adequately protected from others who may have a similar idea or want to steal yours and take it to market first.
By default, when ideas become “inventions” or copyrightable “works,” ownership vests in the individual creator. This means that—in the absence of some other agreement—you or one of your founders, not the company, owns the rights to your secret sauce and can walk away with it at any time.
To prevent this from happening, founders should be sure to execute a Technology Assignment Agreement (“TAA”), which will assign to the company any listed IP owned or created by the individual founders.
Use a Technology Assignment Agreement to Protect IP Created Before Company Formation
A TAA covers IP that was created prior to formation of the company entity. It should be crystal-clear about what remains the property of the founder (the non-assigned IP being set forth in a schedule to the TAA). The terms of the TAA will typically include a conveyance of the IP to the company, representations that the founder is the sole owner of the listed IP, and agreement to execute all necessary documents to effectuate the transfer (such as USPTO filings). TAAs, like any other contract, require adequate consideration, which typically takes the form of equity in the company (as set out in the founders’ equity agreement) and perhaps a small amount of cash.
Why require assignment of the IP rather than just licensing the IP for the company to use? There are two primary reasons. First, assignment indicates the commitment, and “skin in the game,” of the founders to the company. Everyone—investors, lenders, customers, potential employees and partners—wants to see skin in the game. In fact, any sophisticated investor, such as a venture capital fund, will require assignment. VC will want to be sure the company owns all of the relevant IP, falling back to licensing only where absolutely necessary or advisable, such as when the IP in question is just a “toolkit” and not a final product or where industry practice allows it (like in the biotech space) but this is the exception and not the rule.
Use a Confidential Information and Inventions Assignment Agreement to Protect IP After Company Formation
While a TAA addresses IP created before company formation, a Confidential Information and Inventions Assignment Agreement (“CIIAA”) helps ensure the company owns all of the IP created by its founders and employees after the company is formed. A CIIAA has two essential components: the confidentiality agreement and the inventions assignment agreement.
The confidentiality section, predictably, protects the company’s confidential and proprietary information from inappropriate disclosure. The inventions assignment section conveys all IP created by the founders post- formation to the company. This will include both copyrightable works, which may or may not have automatically belonged to the company under the “work made for hire” provisions of the Copyright Act (the scope of which is very limited), as well as patents, trade secrets, and other IP, which do not automatically belong to the company absent an express agreement. Both the TAA and CIIAA are essential to ensure that the company’s IP is actually owned by the company.
Once the company is large enough to start hiring additional employees, those employees will also need to execute a CIIAA to ensure their work product is owned by the company. It is important that a CIIAA is executed prior to the start of employment to: (1) ensure employees are not exposed to confidential information before they are subject to confidentiality restrictions, (2) ensure the employment offer serves as consideration for the contract, and (3) establish the assignment of any inventions created during employment to the company prior to any work being done. Other provisions you may want to include in employment contracts are non-solicitation clauses of company employees, customers, and vendors, and possibly even non-compete clauses, subject to any state-law limits on enforceability (such clauses being very disfavored by courts).
A few additional considerations should be made for contractors. These persons are not employees and thus their work for the company is not inherently and automatically assigned to the company. Contractors should be required to sign a written independent contractor agreement (“ICA”). Such an agreement should include much the same provisions for confidentiality and inventions assignment as are found in employee CIIAAs. If post-termination nondisclosure provisions are not in the ICA itself, a contractor should also sign a forward-looking nondisclosure agreement to make it legally impermissible for him, her or it to share company information after the ICA term expires.
The takeaway here is that a startup’s IP and information is extremely valuable, probably the most valuable company asset, and a few simple but crucial steps can be taken to ensure it is protected. This sets the company up for success both coming to market first and securing needed capital.
GreeneHurlocker partners Andy Brownstein and Jared Burden have significant experience advising startups and entrepreneurs on a range of legal and business issues. Contact them with questions or if you require assistance.