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How to develop a proper Intellectual Property Strategy

Tytus Cytowski explains the importance of having a intellectual property strategy for a startup
Image credit: Tytus Cytowski
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A startup’s intellectual property is its wealth and worth. Accordingly, startups need to have a comprehensive intellectual property strategy and the ultimate goal is for all the intellectual property (IP) generated by and in the company to belong to and be properly assigned to the company. Startups may face 3 major bottlenecks to achieving this.

Issues with founders/employees

  • DIY IP Assignments – Some founders draft IP assignment agreements without consulting experienced legal professionals. This could lead to the use of old and outdated versions of IP assignment agreements, which do not effectively transfer all the IP to the company. There could also be instances where the founders download templates from the internet and then make modifications that do not make commercial or legal sense for the company, such as tweaking to allow some of the IP to reside in the founders or granting all the IP to the founders with only a license to the company. This could make the startup less attractive to investors given that as we noted above, the IP is effectively the company’s wealth and worth. As part of your IP strategy, you should seek the advice of an experienced attorney to ensure that your founder/employee IP assignments are effective.
  • Neglecting to sign drafted IP Assignment Agreements – When startups consult startup attorneys in incorporations, some key agreements are prepared as part of the incorporation packet. One of these is the IP assignment agreement. Sadly, in some cases, all or some of the founders may neglect to execute these documents, rendering them ineffectual. The issue may only pop up when one of the founders is exiting the startup and there is a dispute as to the ownership of the IP created during their time with the company. At this time, it could be an uphill task to get the founder to agree to assign the IP to the company. So, it is important to ensure that all founders execute IP assignment agreements as soon as the incorporation packet is provided to the company.
  • Work for hire issues between Founders and big-tech – Founders that moonlight with big tech companies with all-encompassing IP assignment agreements, could fall into the trap of developing a product for their startup that eventually would belong to their employer. Generally, under copyright law, copyright in a work belongs to the person who created the work. However, there is an exception for work made for hire under the US Copyright Act, which applies to work prepared by an employee within the scope of his or her employment. This exception is to the effect that the copyright in the work made by an employee in the course of their employment belongs to the employer. We have seen instances where employers expand the scope of the work made for hire exception to extend to work generated outside the scope of employment and during after-hours. The implication is that the work developed while moonlighting for your startup would be considered work made for hire and belong to your employee. In one case, Founder X had signed this type of contract with their big-tech employer and was working after hours on X startup. Eventually, when some VC investors were conducting their due diligence on the startup, it was discovered that founder X’s contract with the tech company assigned all IP generated by Founder X, including for work done after hours and outside Founder X’s scope of employment, to the employer. This was a major red flag for the transaction. Even where founders have signed an IP assignment agreement with the target startup, investors may want to avoid the complications of this sort of arrangement. If you are a founder working with another company, in developing your IP strategy, you should be aware of the terms of your contract with your employer to ensure your personal projects are not caught by their IP arrangements.

Issues with Independent Contractors

Startups may choose at their early stages to engage independent contractors rather than outrightly hire employees. One reason for this is to avoid the hassles of employment compliance such as unemployment tax, workmen’s compensation insurance, etc. In doing this, some startups may inadvertently neglect the IP aspects of engaging an independent contractor. Unlike with employees, the default legal position is that the independent contractor (as the creator of the work) owns the intellectual property in the item developed by them unless the IP is assigned to the employer. We have seen startups making the following mistakes with IPs, and these should be avoided.

  • No IP assignment in a commercial agreement with the independent contractor: In some cases, the startup may have negotiated a commercial agreement with the independent contractor’s engagement covering the scope of work, compensation, location, etc. These commercial agreements may not contain key IP provisions that secure the interest of the startup in the project. In the absence of such, the default legal provision could kick in and the IP would not belong to the employer. Accordingly, you should ensure that your commercial agreement includes an IP assignment clause in developing your IP strategy.
  • Failure to execute a separate IP Assignment Agreement: As an alternative to the above, you may be wary of writing in IP provisions into a standard consulting agreement to avoid over-modification. If this is the case, then you have the ready option of entering into a separate IP assignment agreement with the independent contractor. This way you can spell out all the terms governing IP ownership. However, if this is your approach, be sure that both the startup and the independent contractor execute the IP Assignment Agreement and do not negotiate and leave it on the shelf.

Issues with Customer Contracts

There are different kinds of contracts that tech startups may enter into with their customers. Each presents different intellectual property considerations. It is pertinent to know the nuances in the IP relationships between your company and your customers in the different kinds of contracts and be sure that the contract properly reflects these nuances. We discuss the IP issues arising under three major types of IP contract:

Master Service Agreements – One of the agreements which startups typically enter into with clients is a Master Service Agreement (MSAs). A key aspect of the MSA is the ownership of intellectual property. The parties must specifically outline what IP is owned by the service provider (startup) and what IP the customer owns. One mistake which a startup may make is assigning ownership of pre-existing IP to a customer. This is significant and should be avoided at all costs. The ownership of pre-existing IP used in providing the services should remain sole and exclusive with the startup, with a limited and non-exclusive license granted to the customer only to the extent required for the use of and access to the services. Where the customer provides some of its data or pre-existing IP for the services, it should be clear that the customer retains its pre-existing IP, but the startup has a license to use the customer’s pre-existing IP in the provision of the services. Also, the IP in the deliverables developed by the startup should belong to the startup, with a license to the customer solely for use in the services provided. Modifications to the product/services provided by the startup should also belong to the startup. Startups may also require a license (usually perpetual and irrevocable) to incorporate enhancement requests by the customer in the services.

There may be instances where the startup would be providing custom development to the client. In such cases, the customer would typically want to be own all the IP in the custom development. However, a startup should ensure that any of its pre-existing IP used in developing the custom product is retained by the startup, including any IP that it may need to provide services to other clients. The startup may then grant a license to the customer for such pre-existing IP to be used in the custom development. Of course, certain nuances may come into play in negotiating the IP aspects of the MSAs, hence it is important to seek proper legal guidance.

Co-development Agreements – Co-development agreements, as the name implies, involve a collaboration between two companies to develop a product. If your startup enters into a collaboration agreement, you should ensure that each party retains their pre-existing/background IP. This brings the popular question – “what are you bringing to the table?” to mind. Each party would most likely contribute their unique IP to the co-development efforts, which should be retained by the respective parties. Imagine a situation where this key element is omitted in the negotiation of a co-development agreement. This could mean that you have inadvertently created a sort of joint interest in your background IP, to the extent it is included in the joint development and could be detrimental to your startup’s interests. Secondly, the jointly developed IP should be jointly owned by both the startup and the co-developer. This means that you can both freely use and access the IP in the joint development without recourse to each other, exceptions may be made for licenses to third parties by either party. The IP clause would typically also mandate both parties to work together to protect the jointly developed IP, including filing patent applications and bearing enforcement costs. If one party fails to co-operate, then it could lose out on joint ownership.

Pilot Agreements – When entering into pilot agreements, a key question you should be asking is what rights to the IP do we want to grant the client to the IP? Clients may want to own IP to software provided during the pilot phase and you should be careful to avoid this. Given that the pilot phase is a testing phase and there is no guarantee that it would materialize into a full-blown, long-term contract, it is standard for the startup to grant the client only a nonexclusive, nontransferable, and limited license to use the product for the pilot period. You should review the terms of your pilot agreements carefully, to ensure that only a limited license to use the product is granted to the Client which would expire once the pilot phase is concluded.

Intellectual property protections, whether as relates to a startup’s employees, contractors, or customers, are intricate and require keen attention. So, it is important to formulate a comprehensive IP strategy from the onset so that your startup’s IP rights are well protected. While adopting the tips suggested above, also consult an experienced professional to guide you properly.

More from Tytus Cytowski: 

 

                              +++ The most frequent legal mistakes early-stage CEE founders make and how to avoid them

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Tytus Cytowski, is an entrepreneur, angel investor, and lawyer working with CEE startups. He has built a successful startup and technology law practice that has a focus on European startups expanding and fundraising in Silicon Valley.