Intellectual Property Ownership and Why Investors Care
Guest post from Shoobx
Why is securing company IP important?
Securing your company’s intellectual property (IP) is an important part of successfully forming and running your business. It impacts your company’s valuation and distinguishes your business from that of competitors, and will also be closely scrutinized by any investors looking to put capital into your startup. Without the properly executed IP ownership documentation, your hard work and the success of your business will be compromised.
What exactly does it mean to secure your IP? In the most basic terms, your company (not you or your employees as individuals) must own the IP upon which the company relies. This way, even if you or any of your team members leaves the business, they won’t be taking ownership of essential IP with them.
How do I secure my company’s IP?
IP ownership is typically secured through intellectual property assignment agreements, and at a startup everyone who may claim to have any ownership over the company’s IP should sign an agreement that assigns it to the company. This extends beyond just employees—independent contractors and advisors may also need to sign IP assignment agreements.
IP assignment agreements should ideally be executed at the beginning of a relationship, which for employees means when they are hired. In fact, IP assignment agreements are often part of the new hire paperwork. If you’re a founder, IP assignment should take place when initial company equity is granted. Asking someone to assign IP to the company requires sufficient consideration (i.e., sufficient value to support a contract or agreement between parties, in this case between the company and the individual). If the IP assignment is a condition of employment, then employment is generally sufficient consideration. However, if IP assignment is not a requirement of employment then you may need to offer other consideration (such as monetary or equity compensation) as part of the agreement.
What exactly is this agreement called?
IP assignment agreements are sometimes standalone documents, or their essential provisions are included in documents like employment agreements, consulting agreements, or advisory agreements. Many Employee NDAs or Employee Confidentiality Agreements contain IP assignment alongside their other terms.
It should also be noted that there are two similar sounding, yet distinctive types of IP agreements: IP Contribution Agreements and IP Assignment Agreements. For some team members, such as founders, both may be necessary to properly secure your company’s IP. What’s the difference?
- An IP Contribution Agreement assigns any relevant IP that you created before you joined the company to the company, or IP that was created even before the company had been incorporated.
- An IP Assignment Agreement assigns any IP created after you started working out the company, and therefore includes IP that you may not have created yet.
If you’re joining a new company and you have prior inventions or patents that will not be assigned to the company, it should be clear in your IP Contribution Agreement that they are being excluded.
Why do my future investors care?
IP ownership will be closely scrutinized during investor due diligence, which is a key prerequisite to getting funding in the door. If you have missing agreements, cleaning them up will be time consuming and expensive, not to mention the added risk that investors will associate with your company. By ensuring that your IP assignment is properly managed from day one, you’ll set your company up to succeed as it fundraises and grows.