Startup Law 101 Series - Key Legal Rules For Who Owns the IP Relating to Your Startup

As a founder, you need to understand work-for-hire. Why? Because it determines who owns key IP in your startup.

Copyright laws protect creative works, including IP that you develop. When you develop IP for others, the work-for-hire idea affects who owns it.

How does it work?

Here are some guidelines:

1. You develop IP for your startup as its employee -- the IP belongs to your employer. Pretty basic. This is a classic work for hire.

There are gray areas but, if you create IP while doing employment duties for which you are paid, there is no ambiguity. All IP relating to such work automatically belongs to your employer, whether or not you signed any agreement relating to it.

2. You develop IP for your startup as a consultant and are paid for that work, but have no agreement in place relating to the IP rights -- it might surprise you to learn that the IP here would belong to you and not to your startup.

Why? Because the default rule under copyright is that the creator of a work owns the copyright unless (a) it is done as a work for hire or (b) it is expressly assigned under a contract to the other party.

Contractor work is a work for hire only if there is a contract identifying it as such and, in addition, the work falls within certain specified categories of types of work that qualify as works made for hire.

No contract, no work for hire.

No contract, no assignment.

Thus, with no contract specifying that it is a work for hire and with no assignment, the default rule kicks in to provide that you own the copyright to the IP you created even if you were paid for your work.

3. You develop IP for your startup as a contractor and are paid and have a work-for-hire agreement that contains no express assignment provisions in it -- again, perhaps surprisingly, you still would own that IP if it involved a software development effort.

Why? Because software development does not fall within the specified categories that would allow it to qualify as a work made for hire in the contractor situation.

Thus, to ensure that IP rights to software are transferred from the contractor to the startup, you will routinely find language in work-for-hire agreements that says, in effect, "this is a work made for hire but, just in case it isn't, the contractor agrees to assign all IP rights anyway."

4. Which brings us logically to our last case, that of the contractor who develops IP for a startup, gets paid, and does the work under a work-for-hire agreement that characterizes the work as one made for hire and that assigns all IP rights to the startup -- in that case, the startup owns the IP rights free and clear and you retain no rights to the IP.

How might these guidelines play out in practice for you as a founder?

We can assume that you would want your startup to own all its IP. What are potential problem situations by which the startup could face claims from founders or others that parts of the company IP belong to them separately, with at best only a license to use it extending to the company?

Let's look at some cases to see how the guidelines might apply when we strictly consider work-for-hire (for your specific case, see a good business lawyer.

You and your buddies are developing IP for a startup you hope to launch. There is no entity. Ergo, there is no employment relationship and there is no contract between you and any entity (nor, typically, between you and any other person) relating to your development work.

Quick quiz: who owns the IP rights to your work under work-for-hire principles?

Answer: you do.

No employment. No work-for-hire agreement. No assignment. Hence, the default rule applies and the person who created the work keeps all rights to it.

Let's assume your buddies paid you for your work in the case just cited.

Who owns the IP now under work-for-hire principles?

You would still own it.

The mere fact of payment changes nothing. For the rights to transfer, you need a work made for hire or an IP assignment. Without an agreement providing for either of these, the ownership rights stay put with you as the developer - even if you got paid.

Now let's take the same case and assume you are a developer working offshore, say in India. You have a software development agreement with a startup in the U.S. specifying that it is governed by U.S. law. That agreement has a statement of work, defines deliverables, a development timetable, and a price. You comply with all this and deliver the work to the startup. The agreement is silent on all other points.

Now who owns the IP under work-for-hire principles?

Yes, that's right, you, the offshore developer, own it. Payment or no payment, if it is not done as a work for hire, and if the IP rights are not expressly assigned, the startup gets only an implied use license and not ownership of the IP.

Let's shift a little.

You and your co-founders form your startup. You assign all IP rights into the company. Then, in the spirit of keeping things loose, you continue to work on the IP development after company formation without contracts of any kind and without setting up an employment relationship between the company and its co-founders.

Who owns the IP rights to the post-formation development work?

Yes, the founders do, individually that is. So if one of you bolts, the company may have a problem with its IP or may need to do a workaround.

Why so? No employment relationship. No work-for-hire agreement. No assignment. Default rule kicks in and the rest follows.

Let's look at one last case, the one where your startup does a work-for-hire development project for a customer.

Your startup has core IP that it uses in all its consulting projects. It contracts with Big Company X to do some custom development work. It signs the customer's standard form. That form says, "this is a work made for hire and, by the way, if it isn't, you agree to assign all IP rights relating to the deliverables to the customer."

Anything wrong with that?

Yes, there is plenty wrong, at least if you don't want to compromise your startup's rights to its core IP.

In such cases, the boilerplate language (which seeks to assign to the customer who is paying for it any IP that does not otherwise qualify as a work-for-hire) may have an unintended consequence: it potentially sweeps in, along with what is intended by the parties, the core IP that your startup uses for all its projects.

Oops.

As a founder, you need to be alert to the effect of such language. A simple carve-out solves the problem, assuming you catch it up front.

That wraps up our quick tour of some key legal rules for understanding who owns the IP relating to your startup. There are some obvious lessons here: if you as a founding team are drifting along without your IP rights buttoned down, time to get that situation fixed. Don't be slack on this. You might have to pay a high price if something goes wrong.

By the way, in all cases, in order for the contract to stick, a work-for-hire agreement or an express assignment needs to be accompanied by some payment of consideration to the person doing the work. This can be cash or stock or anything else of value. Don't neglect this vital piece.

A final caution: General guidelines will help you spot problem areas but you will need a good business lawyer to help you evaluate them. Gray areas and exceptions to the rules abound. When it comes to your IP, work with a good lawyer to do things right.

Copyright 2009 George Grellas.

About the Author

George Grellas is a Silicon Valley business and corporate lawyer specializing in early-stage tech startups. He founded and heads a boutique startup business law firm whose website may be found at http://www.grellas.com.

The author's entire Startup Law 101 Series of tutorials for founders and entrepreneurs is found at the author's website. Just follow this link showing this article in its original context http://www.grellas.com/faq_business_startup_015a.html and you can link from there to the entire Series.

Disclaimer

This article does not constitute legal advice and should not be relied upon as such. The article sets forth general educational principles only. Consult with a local lawyer in your area about your particular case.

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