AskTheVC addresses the question of what happens to IP rights when the founders go their separate ways. "Bottom line, you have a strong incentive (as does your former partner) to settle this amicably, otherwise, you both are going to be worse off."

I thought it was worthwhile to dig into this a little further, though, and discuss what happens with the various IP rights a startup might acquire.

Often you'll hear 3 founders say "we want everything split 3 ways", but joint ownership of IP can be tricky. Rights and duties with joint ownership are poorly misunderstood, even by many lawyers. More importantly, the rights and obligations of each owner vary by the type of intellectual property and from country to country.  A joint owner of copyright in the US has different rights from a joint owner in England, and a joint owner of copyright has different rights from a joint owner of a patent.

Both copyright and patent rights vest in the original author(s) or inventor(s) respectively, and both can be assigned to the entity. There are some issues to be aware of there though. Any assignment or exclusive license must be recorded to be effective. If one founder is creating the IP (i.e., a patentable business method or system, the copyrighted code), then he or she retains that IP if the company dissolves without a proper assignment. Even with an assignment, the author has an inalienable reversionary right such that they can "reclaim" an assigned work after 35 years. Yes, this is eons to most startups, but it's worth discussing. Reversionary rights do not exist for a work made for hire, because the "author" for these purposes is the company who did the hiring, so this issue is especially relevant if you plan on hiring contractors. (Patent does not have the concept of reversionary rights.)

Another often neglected IP right is trade secret. A trade secret is anything information that conveys a competitive advantage, is not readily known, and that you've taken reasonable steps to protect. It's especially relevant when the creation is not otherwise patentable or, like many early stage startups, when it is not financially reasonable to pursue a patent. Trade secrets are probably the worst type of IP to leave open for interpretation - some districts have recognized joint ownership, but the rights and obligations are not always clear and the case law is sparse. Unlike patents or copyright, a trade secret can be lost by publicly disclosing - so it's especially important to deal with this issue. Joint owners generally have the obligation not to disclose it unreasonably, but obviously there's a lot of room left for interpretating what is reasonable and not.

AskTheVC "can’t think of any company that has fully thought out this scenario and planned for this contingency when forming the company from the onset", but probably these companies probably should. It's easier than trying to settle it amicably later or leaving it to the interpretation of the courts, especially if the divorce is not amicable.


blog comments powered by Disqus