Let’s Talk Legal will be a recurring column written by Alexander Davie, co-founder and member of Nashville-based Riggs Davie PLC. Davie advises startups and emerging companies in all areas of business law.
Founders have a lot to think about when starting a new company, such as finding the right team, developing their strategy and getting the company’s legal structure in place. One item that should not be left out is ensuring the company owns the intellectual property to its content, such as software code, written works and audio/visual material. A key part to this is to ensure that everyone—from founders to independent contractors—working on this content has signed invention assignment agreements.
Such agreements are frequently overlooked in the early stages, but are critical later when the company is seeking capital from outside investors or when the owners of the company are looking to sell it. While they are easy to put in place at the beginning of relationships, they can be difficult and costly to secure later on.
An invention assignment agreement (also known as a “proprietary rights assignment” or a “developments agreement”) is intended to ensure that the company actually owns its intellectual property rather than the employees or contractors who worked on it. Such an agreement is a contract between the company and an individual founder, employee or contractor, requiring that person to assign over all intellectual property rights conceived in the course of that person’s work at the company. This agreement is needed because, by default, intellectual property is not assigned automatically to the company. For example, if the company hires an outside developer to write software for the company, absent an assignment of inventions, in most cases the copyright to such software remains with the developer. The company merely receives a license to use the software.
A lot of people often rely on the work-for-hire doctrine, thinking that this obviates the need for an invention assignment agreement. The problem is, the work for hire doctrine is very limited. It covers copyright, but not patents or trade secrets. In addition, absent a written agreement, it only applies if the person doing the work is an employee of the company acting within the scope of his or her employment. Most startups rely extensively on independent contractors and have very few or no employees. Therefore, the work-for-hire doctrine does not apply in most cases and, when it does, it only protects a subset of intellectual property rights.
The lack of an invention assignment agreement with a person that created important IP for the company could create a stumbling block when a potential investor conducts due diligence on the company. If that happens, the investor is likely to demand that the company obtain one. But if the person is no longer working with the company or, even worse, left on bad terms with the company, it might become expensive or impossible to obtain such an agreement. In addition, if the person still owns the copyright to their work for the company, they could reuse it again in other situations, possibly competing with the company.
The bottom line is that any startup should have its legal counsel develop a form invention assignment agreement for the company that it can have each founder, employee and contractor sign.