Do you own your IP?

It is a poorly kept secret that many founders conceive the idea for their startup while working for someone else. While this situation is common, it still creates a complex situation and some baggage. The founder should fully understand the nature of his or her previous employment relationships. This means studying the details of your letter of hire, employment agreement, non-disclosure agreement, and other agreements with your employer. Items on which to focus include:

IP assignments: Most technology businesses require every employee to sign an intellectual property assignment agreement. These agreements provide that any inventions, ideas, work product or other developments conceived or authored while an employee of the company, will be owned by the employer. Even in the absence of a written assignment agreement, statutes or the common law will often provide that where the author of a copyrightable work was employed by another person under a contract of service, and the work was made in course of his employment, the employer is deemed the first owner of the copyright, unless otherwise agreed by the parties. As a result, if a new business is in any way dependent on work performed by a founder for a previous employer, the previous employer may have a claim against the entrepreneur’s business relating to intellectual property rights. The ownership of intellectual property rights vis-à-vis previous employers will be of critical importance not only to the entrepreneur, but to co-founders and potential investors in the business.
Confidentiality obligations: Even where intellectual property rights are not an issue, the founder must consider his or her confidentiality obligations to former employers. Employees generally owe a duty to maintain the secrets and confidential information of an employer, whether or not there is a written agreement to that effect. Disclosure and use of confidential information to operate a new business, especially one that competes with a former employer, may result in legal action against the founder and/or his or her new business.
Non-competes/non-solicits: Many employment agreements include covenants from the employee not to compete with the business, and not to solicit employees, customers or suppliers of the former employer for a period of time after the employee’s employment is terminated. Where a founder is a fiduciary of the former business (this can include a director or officer), the fiduciary will owe additional duties to the former employer, which may include a duty of non-solicitation.

Think about these restrictions when recruiting, including co-founders, employees or contractors. Greater risk exists if a group of employees wants to move en masse, particularly if the departure is badly received by the former employer.

While confidentiality, non-compete and non-solicit clauses are usually tied to employment, they can also appear in independent contractor agreements. Founders should review agreements between their prospective contractors and former employers of such contractors for IP and other restrictions, before the prospective contractor is engaged. If founders are, or were, investors in another company, a stockholders agreement or advisory board agreement may also contain obligations or restrictions that affect the new business.

What precautions can I take as a future entrepreneur with a day job?

Be careful not to use your employer’s resources (such as technology or offices), and avoid working on your startup business during work hours. It’s very easy to leave behind a trail of e-mails and other electronically-stored information which reveal that you were working on your startup while still employed at your former job.

What other parties may have rights over IP?

In addition to the rights of former employers, areas of concern are:

Rights of academic institutions to inventions and works resulting from academic research
Rights of government entities, or restrictions on use, resulting from financial and other government assistance given to an inventor or author
Rights of other persons resulting from contracting or consulting services provided by individuals involved in the new business or by acting in an advisory capacity
Potential for patent infringement (where independent development is not a defense)
License rights obtained from other parties that are not sufficient to permit the new business to operate in its intended fashion
The uses of inventions or works that were conceived of, or developed jointly, with one or more other parties

In each case, retain all relevant contracts and understand what is in them before seeking outside investment. You have a better prospect of retaining credibility with investors if you are able to flag potential IP issues in advance.

Questions? Email us at startups@dentons.com.