Tag Archives: intellectual property

Should a Founder License IP to a Startup?

Often a startup founder will desire to license his or her intellectual property to a new startup venture, rather than transfer ownership to the startup at incorporation via a technology assignment agreement. This is a bad idea.

Founder IP License Problem

Even if the founder offers the startup a completely startup-favorable license, the founder IP license scenario should be a non-starter for most startups. The problem is that even a free and exclusive license to the startup falls short of vesting IP ownership with the startup.

If the intellectual property to be licensed by a founder is a big piece of the startup’s technology, the founder license problem is amplified. If the startup doesn’t work out, and must be sold in a liquidation, the license agreement may be terminated. Quite simply, the startup will be without its only asset of value.

If the startup is without an important and valuable asset, why would someone invest in the startup?

Founder IP Should Become Startup IP

Founders should transfer their IP ownership to the startup. Founders create wealth through the ownership of their startup’s equity, and withholding the outright transfer of IP runs contrary to this principle. Even worse, the founder may be hedging his bet regarding the success of the startup.

If a founder is hesitant to transfer ownership of his IP at incorporation, a possible solution is to increase the founder’s equity share. This may be a “fair” thing to do, since how a startup should split equity between founders depends on various factors that include founder IP contributions.

Conclusion

A founder license of IP will greatly reduce–and likely eliminate–the chances an investor will consider your startup worthy of investment dollars. Thus, if you are a potential co-founder of a startup where another founder will only license his or her IP to the startup, I would think twice about joining the startup.

Lockdown Lost-Founder IP

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.

You Can’t Spell Corporation Without “IP”

I watch “Shark Tank” on ABC. I hope one day they get pre-money and post-money right.

A segment on Sunday’s episode did manage to highlight a key point for startups:

TRANSFER THE INTELLECTUAL PROPERTY TO YOUR STARTUP COMPANY

In the episode, Coverplay Inc., was looking to raise about 350k from the show’s angel investors. A few investors made proposals and one particular investor offered Coverplay’s 2 founders 350k in exchange for 40% of their company. Coverplay countered with 350k in exchange for 30% of the company…and 10% of the patent. The show went to commercial and I said to my wife “Uh oh, their corporation doesn’t own the patent.”

After the break, all the investors pulled their deals off the table. Without the intellectual property, there was no business. The investors (rightfully) assumed the patent was owned by the company. In essence, Coverplay was asking for investment in something they didn’t own. (Side: This is happening often on the show. Many entrepreneurs are claiming they own the IP when they really don’t.)

Coverplay explained that Allison Costa, one of Coverplay’s founders, owned the patent. Then Allison further explained that her ex-husband also owned part of it as well. I can only assume that Costa had some type of patent license deal with Coverplay.

When starting a company involving intellectual property, you must transfer the IP to your startup. For example, if the intellectual property is developed prior to incorporation, you can transfer the IP via the founder’s stock purchase and tech transfer agreement.