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General Ownership of Intellectual Property

Intellectual property is an increasingly important asset for technology startups, and early actions are required to be taken on the part of a startup' management to ensure intellectual property protection. The four main types of intellectual property are trade secrets, trademarks and service marks, patents, and copyright. Some technology startups have intellectual property assets that fall into all four categories, while others have only one type of intellectual property as a basis of revenue creation. Intellectual property that is valuable to a startup comes in many forms, for example: (1) technology, either developed in-house or purchased from others; (2) trademarks, trade names, domain names and related marketing tools; (3) artistic and literary creations, including product designs that create customer association; (4) customer lists; (5) confidential administrative information related to employees, policies and procedures; (6) information belonging to customers and other contracting parties. 

Virtually all angel and venture investors will investigate two factors concerning the startup – experience of management team and startup's intellectual property assets. These two factors determine if the startup has created, or is able to create, a portfolio of defensible intellectual property assets that provide a competitive edge to the startup. Intellectual property keeps its value only if it is protected, used and distributed in the ways intended by startup’s management. Protecting intellectual property is therefore an increasingly important function of the startup management. There are many ways to ensure such protection, but they all are largely dependent on management and employee awareness of the existence, nature, intended use and ways to protect each type of intellectual property.

Many startups have discovered that it does not own the intellectual property rights in the technology that forms the basis of its business. This is a particularly acute problem in the early stages of the company. For example, a founder who participated in the early development of technology may have failed to transfer his ownership rights in the intellectual property to the company when it was formed. If such transfer does not occur and the founder later leaves the startup, the founder, and not the startup, owns the rights to the intellectual property. The startup then needs to obtain the rights from the founder through assignment or license, either of which may prove costly to the company. Additionally, venture investors may be reluctant to invest when a startup's intellectual property rights are licensed by the founders to the company instead of being owned by it, regardless of whether the founder is still involved in the organization. There is a strong preference among angel and venture investors that the startup own the intellectual property that forms the basis of its business.

Another ownership problem common in the early stages of a startup's life involves intellectual property developed by individuals who are independent contractors because the startup does not formally employ them. As a general rule, in the absence of a written agreement between the startup and the contractor that states that a work product is a “work made for hire”, the contractor and not the startup owns the intellectual property rights to the work product, even if the startup paid the contractor for the work. In the absence of a proper written agreement, the startup will, at most, possess only an implied license to use the intellectual property created by the contractor. Thus, it is essential that all work involving intellectual property be performed by employees of the startup or by contractors working under a written agreement that assigns all of the contractor's right, title, and interest in the intellectual property to the startup.