If managed correctly, intellectual property (or “IP”) can be the most valuable asset to a company. Ensuring that you have the right IP protection in place is essential to maximising the potential of your IP throughout the life cycle of your business.
It is also important to be aware of who owns IP by default and, where the default position isn’t preferable, for an agreement to specify otherwise. In this article, we will consider the default IP ownership position in relation to a founder, a shareholder, an employee and a consultant or third party, and look at how to protect your IP in the relevant agreements.
FOUNDERS AND SHAREHOLDERS
Founders are often responsible for creating or giving the instruction to create, the foundational IP for their company. Typically, founders create, develop and register IP rights (or other similar rights) before the incorporation of their company. They might, for instance, come up with business or brand names, formulate algorithms, register domain names, develop the website, which all hold value.
As a general rule, any IP that has been created by the founders prior to the incorporation of the company would be owned by the founders themselves (rather than the company), unless an agreement – typically a shareholders’ agreement or an assignment agreement – provides otherwise.
It is equally important to specify in the relevant agreements that any IP developed after the incorporation of the company will be owned by the company and not its founders. Including such a provision is crucial because the value of IP has a substantial impact on the overall value of the company (and typically its revenues), which ultimately impacts both the appeal of the company to potential investors and the level of distributions to the shareholders.
While the economic benefits of the assignment to both the company and the founders seem obvious, disagreements do arise. Therefore, it is always best to address the sensitive IP assignment issue early on to avoid any contentious scenarios.
We would normally suggest addressing the IP assignment by including a robust clause in the shareholders’ agreement stating that all shareholders agree to assign all IP, whether created before or after the incorporation of the company, to the company in full. It is also prudent to nominate the company as the “attorney” of each shareholder so that all legal documentation can be completed in time and in compliance with the relevant formalities.
EMPLOYEES
While most employment contracts state that the employer owns all IP related to the business developed by an employee, it is very important to ensure that the scope of the clause is broad enough to cover and protect the company. For example, an employment contract should clearly state what type of work would be within an employee’s course of normal duties and the hours of work that these are carried out in.
When an employee creates or contributes to the creation of an invention outside his or her normal duties, it is the employee and not the company who has rights to that invention. It is therefore important to establish clear boundaries between duties at work and those carried on outside of the workplace when discussing employment contracts with your team.
If an employment contract was not entered into at the start of employment and IP has been generated by the employee, the employer may need to provide additional, sufficient consideration to support the agreement. Such consideration should be more than a nominal amount and can include a promotion, a one-time bonus, or, for example, a grant of restricted stock options.
CONSULTANTS AND OTHER CONTRACTORS
Compared to an employee, the nature of a consultant’s relationship with a company is much more flexible. As a default position, the consultant owns any IP created for the company, unless otherwise specified in their consultancy agreement. This is also generally the default position when contractors are engaged unless there is written agreement to the contrary.
If a consultant is unwilling to assign ownership of the IP they develop to the company, it is important to ensure that the company has permission to use the IP as needed, which can be accomplished by introducing a clearly worded IP licensing clause into the relevant documentation.
CONCLUSION
In the absence of a written agreement, it may be difficult to establish who owns what may be the most valuable asset of your company. It is therefore important to establish clarity in writing with each stakeholder – your founders, employees, consultants and other service providers – as soon as possible to avoid any disputes that may negatively impact the value of your business now or in the future.
HOW COULD WE HELP?
Protecting your company’s IP is of vital importance to the success of your business. We are here to help, share our market knowledge and guide you through the key concepts discussed above. Book a call with our friendly and experienced legal team to discuss the best ways to protect your IP or your other legal needs.
Our legal commentary is not intended to be a comprehensive review of all developments in the law and practice. Please seek legal advice before applying it to specific issues or transactions.
