Should a Founder License IP to a Startup?

By Incorporation

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.


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