Last week’s blog presented the situation of a company that has a great idea, a prototype product, customer discovery, and an awesome management team – all vital milestones along the path of a startup. The next step is to secure outside funding to continue product development, build out the sales team, etc. Many early stage companies waste time and money when pursuing funding because they are unfamiliar with the process of raising money or understanding the mindset of investors. Having poor documentation (or none at all!) regarding formal ownership of the company’s intellectual property (IP) is one area where I see frequent missteps.
A key element in the value of any technology company, regardless of its growth stage, is its intellectual property. This may seem obvious, but many early stage companies have not locked down their IP ownership. Who actually owns their IP? Typically, many individuals and entities are involved in the development of the company’s technology, some as employees and some as contractors. However, the company often overlooks formalizing these relationships. When the company gets help with product development they either do not put that relationship into a written contract, or they prepare a written contract that omits the exact, bullet-proof language that is essential to assure that the company has full and sole rights in the intellectual property. Sometimes the shortcomings in this area result from the “I just used an agreement that I got a friend/from the Internet/from a different deal” syndrome –a sure-fire way to have a document that may look good to the untrained eye but has major legal flaws or omissions.
For an investor to consider an early stage technology company, it is vital for the company to have good documentation showing that their ownership of their technology and IP is fully buttoned-down. I have seen numerous instances where the company did not have the necessary documentation which resulted in long delays in funding. In some cases, problems in this area caused the deal to fall apart and no investment being made – now that’s a problem!
This problem is easily avoided by having an agreement with appropriate assignment of IP language prepared by experienced counsel and signed by everyone involved in your company, whether employees or contractors. Rather than trying to pick and choose and remember who should sign, the easiest approach is a blanket one – all employees and contractors need to sign an IP ownership agreement. In many cases, it is appropriate and advantageous to also include confidentiality provisions. It is important not to use a form from some other deal – there are too many potential differences that would escape a non-legal eye (items such as different state law, inaccurate description of the IP, inclusion of provisions that have no bearing on the current situation, etc.).
As is true with most problems of this sort, this is a relatively simple matter to address when done at the front end. When the company waits until funding is imminent, problems invariably arise, including former employees and contractors who can’t be located or who have no incentive to sign a document after the fact. In extreme cases, the former employee or contractor assets a claim that that they have ownership of some portion of the company’s IP – now that’s a deal-breaker for investment! This is another classic case of “an ounce of prevention is worth a pound of cure.” Do it correctly at the outset, and you will save yourself time and money, and at the same time greatly increase your ability to successfully attract investors.