Startup Lawyer | Lockdown Lost-Founder IP
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Lockdown Lost-Founder IP

Posted 26 Jan 2010

If you won the lottery today, how many long lost relatives (that you don’t recall) would come out of the shadows of your family tree to test the generosity of their favorite relative? I’m willing to bet a few.

Now if your startup received a $5MM Series A investment from a venture capital firm, how many developers (that you can recall) would come out of the shadows of the internet and claim to be your startup’s long lost founder? The answer to this question depends on how well your startup secures its intellectual property.

Lost Founders

You may not consider a developer that worked 1 day on your startup 2 months before you incorporated a “founder.” But if your startup becomes a wild success, the developer will. Even worse, this lost founder will have more leverage now with your startup than if you had acquired his intellectual property at the outset.

Even if you aren’t worried about long lost founders laying claim to your startup’s intellectual property, your potential investors are. The status of your startup’s intellectual property, including whether you have signed agreements with all developers, is typically among the first set of questions your startup will receive from a potential investor. Thus, it’s wise to lock down your startup’s IP early to prevent the lost founder problem.

How to Lock Down the IP

One of the most important aspects of a startup incorporation is the ability to transfer intellectual property ownership from the founders to the startup. Each founder is issued shares in the startup in exchange for the founder’s intellectual property (and usually a small amount cash). In other words, the startup issues shares to the founder as consideration for the founder’s intellectual property and small check. This element of consideration is required for the formation of a valid, binding contract. The exchange is typically handled via a “Technology Assignment Agreement.”

But what about developers who work for the startup that aren’t founders?

Consideration for services rendered should be given to all developers and consultants that work on anything IP-related at your startup. This includes whether the developer or consultant worked prior to your startup’s incorporation or afterwards. Like the incorporation, the intellectual property transfer will be executed pursuant to a Technology Assignment Agreement.

The consideration given to developers and consultants does not have to include your startup’s equity. Consideration can also be cash. But since cash tends to be a scarce resource at startups, such consideration typically takes the form of restricted stock or stock options.

Conclusion

Like the lost-relative problem occurs only upon a winning lottery ticket, the lost-founder problem only occurs if your startup is successful. To avoid lost founders from showing up on your startup’s doorstep, take proactive measures to lock down your startup’s intellectual property.

11 Comments
  • Dutchkabuki
    Posted at 12:49h, 27 January Reply

    I would also add, that if you do have "lost founders" hanging out there, its better to proactively negotiate and sign an IP contract prior to closing your VC round. It puts you in an offensive negotiating role ("I can't raise the money if you don't sign this paper and take this $5k check") and puts a catalyst/deadline out there for action ("You need to sign by Friday or I lose the VC deal"). This is much better than a slow burn defensive negotiation w/ the "lost founder" sending legal nastygrams.

  • Dutchkabuki
    Posted at 07:49h, 27 January Reply

    I would also add, that if you do have "lost founders" hanging out there, its better to proactively negotiate and sign an IP contract prior to closing your VC round. It puts you in an offensive negotiating role ("I can't raise the money if you don't sign this paper and take this $5k check") and puts a catalyst/deadline out there for action ("You need to sign by Friday or I lose the VC deal"). This is much better than a slow burn defensive negotiation w/ the "lost founder" sending legal nastygrams.

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    Posted at 20:50h, 22 March Reply

    [...] (1) Entity Choice: Corporation or Corporation (2) State of Incorporation: Delaware (3) Authorized Shares in Charter: 10,000,000 Shares (4) Type of Shares: Common Stock (5) Par Value of Common: $0.0001 (6) Initial Founders Issuance: 8,000,000 Shares (7) Founders Equity Split: Depends on the Team, But Quickly and After the Awkward & Difficult Conversations (8) Vest Founders Shares?: Hell Yes (9) Vesting Schedule for Founders Shares: 4 years with a One Year Cliff (10) Consideration for Founders Shares: Cash & IP (11) Handling of “Lost Founders”: Lock Down the IP (then Wish Them Well) [...]

  • Simon
    Posted at 14:58h, 05 April Reply

    Great post Ryan! I am currently in the process of forming a c-corp with two other partners and we’re hung up on an related issue–future business related IP created by founders. What’s standard policy? I was under the impression that future IP created by founders that is related to the business of the company, even if the creator was moonlighting during off hours, should be owned by the company. (The creator who is a founder should want to contribute it to the company anyway). Is it ever okay to assign individual ownership or % ownership of say patents by some different % breakdowns than the ownership structure of the company? My concern is that it creates a potential for a creator to decide when/how he would share/contribute relevant IP to the company–no alignment of interests. I can see investors running from this already. Any advice would be greatly appreciated. Thanks!

  • Simon
    Posted at 09:58h, 05 April Reply

    Great post Ryan! I am currently in the process of forming a c-corp with two other partners and we’re hung up on an related issue–future business related IP created by founders. What’s standard policy? I was under the impression that future IP created by founders that is related to the business of the company, even if the creator was moonlighting during off hours, should be owned by the company. (The creator who is a founder should want to contribute it to the company anyway). Is it ever okay to assign individual ownership or % ownership of say patents by some different % breakdowns than the ownership structure of the company? My concern is that it creates a potential for a creator to decide when/how he would share/contribute relevant IP to the company–no alignment of interests. I can see investors running from this already. Any advice would be greatly appreciated. Thanks!

  • Kaleab
    Posted at 21:54h, 24 August Reply

    hey Ryan, I cant tell you how helpful I've found your blog to be to me, my upcoming fashion label/company. I look at it every day when, i have questions about anything,when i'm explaining something to friends and family as to what kind of a Corp i am going to set up. okay so i am looking to set up an s corp fashion company/label. i am the designer, also its sole founder. i will be bringing directors and will have a board. so i am going to be looking for angel investors to get it going and everything but i dont want to put my start up in a hand of some one else i want to put 20 to 25% for a start up of 100 to 250k and have 55% for me as it's founder and designer and the rest as stock pool, i have been working for this for the last year and so is that possible to do ? and also i want to put my par value at .0001 for 10,000,000 shares , if i sell 1,000,000 to 1.5,000,000 shares for equity of 20 to 25% for 100 to 250k is that possible and i am giveing my self 55% because i am the designer,the one with the brains for this idea and i have given it place to work in my house to design and every for the past year, a half and have put lots and lots and lots of time to this.

  • Kaleab
    Posted at 16:54h, 24 August Reply

    hey Ryan, I cant tell you how helpful I've found your blog to be to me, my upcoming fashion label/company. I look at it every day when, i have questions about anything,when i'm explaining something to friends and family as to what kind of a Corp i am going to set up. okay so i am looking to set up an s corp fashion company/label. i am the designer, also its sole founder. i will be bringing directors and will have a board. so i am going to be looking for angel investors to get it going and everything but i dont want to put my start up in a hand of some one else i want to put 20 to 25% for a start up of 100 to 250k and have 55% for me as it's founder and designer and the rest as stock pool, i have been working for this for the last year and so is that possible to do ? and also i want to put my par value at .0001 for 10,000,000 shares , if i sell 1,000,000 to 1.5,000,000 shares for equity of 20 to 25% for 100 to 250k is that possible and i am giveing my self 55% because i am the designer,the one with the brains for this idea and i have given it place to work in my house to design and every for the past year, a half and have put lots and lots and lots of time to this.

  • Kaleab
    Posted at 01:26h, 25 August Reply

    hey Ryan,

    also when you say IP what that in relation to start up looking for investors?

  • Kaleab
    Posted at 20:26h, 24 August Reply

    hey Ryan,

    also when you say IP what that in relation to start up looking for investors?

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