Dear Founders: Here Are Three IP Mistakes to Watch-Out For

by Scott Edward Walker on October 19th, 2020


Over the past six months, my firm has been engaged by a number of startups with significant intellectual property (“IP”) problems.  In a couple of cases, the founders played lawyer on their own; in the other cases, the founders either used (i) a Web service that did not address IP issues or (ii) an inexperienced law firm.  The purpose of this blog post is to briefly discuss the three most common IP mistakes that founders make.

Mistake #1 –Your Prior Employer Actually Owns the IP

If any founders were employed prior to launching their startup, they must ensure that none of the prior employers have any rights to the startup’s IP.  This would arise as a result of a founder improperly “moonlighting” (i.e., working on the startup) while employed.  Even a founder’s use of a prior employer’s laptop and/or cell phone in connection with the new venture could be a problem.

Who owns the IP — the old employer or the founder/startup — is governed by state law and the terms of any agreements that the founder executed.  Accordingly, legal counsel must review all of the written agreements between the founder and his prior employer (as well as the employee handbook/manual) to determine if there are any provisions that may give the prior employer rights to the startup’s IP. 

Under California law (regardless of what the agreements or other documents say), an employee owns any “inventions” that that he developed entirely on his own time without using the employer’s equipment, supplies, facilities or trade secret information, except for those inventions that either: (i) relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (ii) result from any work performed by the employee for the employer.

The nightmare scenario for founders is that they are heads-down and working on their startup for a number of years and finally get some headlines on a successful financing or exit.  Then the prior employer rears its ugly head and claims that it actually owns the startup’s IP.  Unfortunately, I was involved in such a scenario a few years back, and it cost the founders a lot of money to get the prior employer to agree to execute a waiver.

Mistake #2 – You Did Not Assign to the Company All IP Created Pre-Incorporation

Any IP created by a founder (e.g., code, designs, logo, etc.) prior to incorporation must be assigned to the company.  Usually this is done as part of the founder’s Restricted Stock Purchase Agreement pursuant to which the IP is contributed to the startup as full or partial consideration for the shares of common stock issued to him in a tax-free transaction under Section 351 of the Internal Revenue Code.

A huge problem arises if one of the founders leaves prior to incorporation and takes his rights to the IP along with him; or if the assignment of IP is not properly made and the founder leaves post-incorporation, but prior to this issue being cleaned-up.  In both cases, the company is in the difficult position of trying to negotiate with a departed founder.  (This issue is akin to trying to negotiate with a departed founder who is not subject to a vesting schedule – see post here.)

Another problem often arises with respect to IP created pre-incorporation by outside developers or contractors (i.e., non-founders), particularly if they are located outside of the United States.  The IP created often never gets assigned to the company at all either because there was no written agreement or because the company was not a party to the agreement (because it did not exist at the time).

Mistake #3 – You Did Not Assign to the Company All IP Created Post-Incorporation

Once the corporation has been formed, the ownership of the IP should be protected by requiring all of the company’s founders, employees and contractors to execute a Confidential Information and Invention Assignment Agreement (“CIIAA”).  This is a standard agreement and automatically assigns to the company any IP created by founders, employees and contractors post-incorporation.  (Note that there are three different forms depending upon who the counterparty is.)

As discussed above, any IP created pre-incorporation will typically be assigned to the company in exchange for equity.  In other words, the startup actually purchases the pre-incorporation IP.  With respect to IP created post-incorporation, the CIIAA is typically referenced in the offer letter that employees must sign or the contractor agreement that contractors must sign, and thus no separate legal consideration is necessary.  Moreover, the IP creation and assignment is forward-looking.   

Again, IP-ownership problems often arise in the context of a financing or an M&A transaction when the investors or acquiror is unable to establish a clear chain of title to the startup’s IP as part of their legal due-diligence investigation.  This is why it is critical that IP issues be addressed early on.  Indeed, the last thing a founder wants is to be chasing down (and negotiating with) old developers and/or departed founders in the mist of a transaction.


If a startup’s most valuable asset is its IP/technology, it is self-evident that reasonable steps must be taken to protect that asset and to ensure it is legally owned by the startup.  While the above mistakes should be a helpful introduction, founders must understand that IP protection comes in different forms, and one size does not fit all.  For example, for certain startups the filing for a patent may be appropriate; for other startups, a patent may be a waste of time and money.  Accordingly, the first step for founders is to sit down with experienced startup counsel and identify all of their startup’s IP.  They then need to come-up with an effective, reasonably-priced strategy to protect such IP.

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