By Elena Vrabie
How stressed, tired, or moody are you on a scale from 1-9? Is anxiety patting […]
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.
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.
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: