Chris Daming, J.D., LL.M.
If you or another founder created any intellectual property prior to forming your company, you have to assign that IP to the company after it's formed. Otherwise, whoever created the IP prior to formation is the owner of that IP, not the company. And it makes sense because imagine that you and a fellow co-founder worked on 5 different concepts for 5 different startups prior to forming any company. The new company shouldn’t just automatically own anything you’ve ever thought of and created--you need a contract for that to happen.
Does it apply to me?
If you or anyone else created intellectual property (trade secret; trademark; copyright; patent) prior to forming your company, then it applies to you.
Same goes for after the company has formed. You need to have some type of assignment or license to indicate that the IP you’ve created is owned by the company, not you.
Why is making this mistake going to destroy my business?
Because this mistake could cost you the entire value of your business. For many modern companies, their only asset is the IP. If your co-founder created your product prior to forming your business and the business started millions of dollars, without an IP assignment that co-founder could leave your company anytime and start his own business with that IP.
Or let’s say that you’re looking for an investor. And prior to investing, you find out in due diligence that your co-founders never assigned their IP to the company. This could be a disaster because suddenly whichever of the co-founders created that IP can have a lot more leverage and try to get more ownership or better rights within the company.
Actionable Takeaway
Require everyone in your company to assign or license the IP related to the company so that the company owns it. Check out our other blogs to know more about failure to ensure you own IP in general, failure to ensure you own copyrights specifically, or failure to have a contract over graphic designs or copy.
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Example Will and Chet formed Salesly, LLC last month. In the year prior to forming, Chet had developed all of the code for Salesly’s app while Will handled operations and marketing. A year later, right when Salesly was starting to take off, Will found out that Chet started a competing company. Chet sent Will a cease-and-desist letter telling him he could no longer can use the code Chet created created. Chet can do this because Salesly never transferred the ownership of the IP Chet created prior to Salesly’s formation. Which means that Chet owned the IP, not Salesly. Will could’ve solved this by having an IP assignment contract. |
The same example is true if Salesly had hired a contractor to write code or do graphic design graphic work for them without a written contract. They would’ve needed a written contract to have both a work-made-for-hire clause and assignment provision--otherwise, the contractor owns the rights to that IP.
Do you need a lawyer for this?
The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes (especially if you have multiple owners). But often for single-owner businesses, you don't need a lawyer to start your business.
Many business owners instead use tools like Legal GPS for Business, which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.