What is founder IP?
Many businesses are formed out of someone investigating a problem in a non-commercial context. For example, they may be working or studying at a university, or tinkering in their backyard shed. During this formative stage they are likely to be creating the ‘core IP‘ around which the business is later formed.
If the idea you are investigating has legs, and a business is formed around the idea or concept, you will need to create a new legal structure through which to commercially exploit the IP. This will invariably take the form of a company. One of the key attributes of a company is that it has an entirely separate legal identity to its shareholders and directors.
When people come to invest in your company, either as co-founders or providers of financial capital, one of the key things they will want to ensure is that the company is the owner of all the intellectual property associated with the business concept.
The general starting position is that intellectual property is owned by the individual (human) who creates it. There are then a few modifications to this general rule. For example, the IP created by an individual who is formally employed by another legal entity is automatically assigned from the individual to the employer. In all other cases, the individual creating the IP retains ownership of the IP, unless it is specifically assigned to another party.
Therefore, a critical step is properly founding a start-up is to ensure that all pre-existing or ‘founder’ IP (and future generated IP) is properly assigned from the individual human founders (and other contributors) who created it, to the company. We call this a ‘founder IP assignment’.
The founder IP must be assigned in writing. The assignment documents will be critical due diligence items that future investors will look to see to ensure that they are investing in all of the critical IP. If these assignments are missing or incomplete, this is likely to fundamentally undermine the ‘investability’, and therefore commercial viability, of your venture.
Who needs to assign their IP?
The first step in securing the founder IP is to identify all of the individuals who have contributed to the creation of the founder IP. This will include all the founders, but it may also include other parties, such as academics, researchers, test-site owners, contracted coders, data analysts, designers, copy-writers, advisers and consultants.
It is likely that the people you involve at the outset of your venture will not be engaged as formal ’employees’, but rather will be informal collaborators or contractors. You will therefore not benefit from the automatic assignment of their IP to you or your entity. It is critical that you have in place written assignments of this IP. If you do not have a separate company to assign this IP to at the time, then the IP is likely to be assigned to you personally, and therefore becomes ‘acquired IP’ that you own and that needs to be assign to your company as part of your founder IP.
Do you need to assign your IP? Call us now on 1300 654 590 or email us. We can help.
What IP needs to be assigned?
The assignment of founder IP needs to clearly identify the whole of the IP relevant to the business. This seems obvious, but many assignments we review in due diligence do not adequately cover all the IP that needs to be assigned from the founders to the company.
The assignment should identify:
- The full legal identity of the person or entity making the assignment. First and last name is not sufficient, you should obtain enough detail about the identity of the person so that they can be clearly identified in the future. This is particularly important if you have engaged overseas persons to help you with things like code.
- The time period over which they generated the IP. This should be open-ended backwards in time prior the assignment, but also clearly identify the key time period. For example, “All IP created, modified or acquired by Joe Bloggs before the date of this assignment, and including the IP generated during the period commencing on 10 January 20XX and ending on the date of this assignment.”
- The nature of the IP generated. Once again, this should be open-ended but also identify the core IP that was generated. For example, “All IP, including but not limited to all copyright in the computer code…” You should also consider other items that may not be viewed as IP, such as domain name registrations, phone numbers, and unregistered business names and trade marks.
- The project to which the IP relates. For example, “All IP… in and associated with the document automation and process flow controller solution known as ‘Falcon’, including the online and desktop versions…“
As noted above, the assignment should not just relate to the IP created by the assignor, but also include any IP that was acquired by the assignor. In many cases, a founder will engage third parties to create IP on their behalf, which later also needs to be properly assigned to the company.
If you need assistance with identifying which IP needs to be assigned and how to assign it, call us now on 1300 654 590 or email us.
What about future IP?
Most founder IP assignments only deal with the IP that was created prior to the company being formed, i.e. the IP that is already in existence at the time the IP assignment is formally documented.
However, the company also needs to consider ownership of the IP that is created after the company is formed, i.e. future IP.
Assignment of future IP rights can be documented in the same agreement as the founder IP assignment, and we generally recommend that the IP assignment includes clauses to this effect. This ensures that you do not need to do more IP assignments down the track (or at least provides a fall-back position if another document is ineffective or insufficient).
An alternative is to limit the founder IP assignment to historical IP, and then enter into separate documentation to handle future IP. For example, future IP may be assigned by virtue of a formal employment relationship between the company and the founders, or in a separate contractor agreement.
Our view is that the issue of IP is so critically important to the value of your enterprise, that separate IP assignments should be entered into with all team members. This often takes the form of a comprehensive ‘confidentiality, commercial restraint and IP assignment’ deed.
Concerned about future IP? Call us now on 1300 654 590 or email us to start protecting your future IP rights.
Other key assignment terms
Other key terms of the founder IP assignment include:
A ‘further actions‘ or ‘perfection’ clause that legally obliges the assignor to enter into further documents and generally provide any required assistance to perfect the assignment of the IP. For example, the assignor may need to cooperate with a formal application for a patent as the inventor.
A moral rights waiver, so that the assignee cannot later assert moral rights over any of the IP that is modified or incorporated into other IP by your company.
Does your company need to pay for the IP?
Generally, contract law requires the assignee (recipient) of IP to provide something of value (i.e. consideration) in return for the assignment of the valuable rights by the assignor.
If you have engaged third parties to assist you create IP then it is likely that you have already provided them with payment for their services. However, if you did not document the assignment of their IP at that time, and you later go back and request that they formally document the assignment of IP, you may be asked to provide them with additional consideration for this. This is why it is critical to get legal help before engaging a third party to help with your enterprise.
As for the IP created by the founders of your enterprise, it may not be clear what the company has provided to them in return for the assignment of their founder IP.
A good place to start is to formally document that the equity (shares) the founders receive in the company is in part consideration for the assignment of their founder IP. However, this is often overlooked at the time the company is formed and the shares are issued, and there is not documentation of the assignment in return for the shares.
If you are putting in place founder IP assignments after the company has been formed, then you either need to identify fresh consideration for the assignments, or document the assignments in the form of a ‘deed‘ rather than a contract.
A deed does not require consideration to legally bind the assignor. However, the deed needs to meet the formal requirements to properly constitute a deed at law. This includes having the document appropriately witnessed and delivered. One common mistake we see is start-ups using electronic signing applications to record the IP assignments. Most (all) of these applications do not provide for the effective execution and delivery of a deed.
Where to from here?
In summary, as a founder of an enterprise you must ensure that the legal entity you set up to exploit your business concept owns all of the IP associated with the concept. This includes the IP that is created directly on behalf of the company, but also any IP created by parties outside the company or in the time period before the company was formed.
Call us now on 1300 654 590or email us to lock in your IP rights.
The information contained in this post is current at the date of editing – 05 September 2024.
