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What Startups Need to Know about Business Contracts & Common Intellectual Property Errors

What Startups Need to Kno…

First time startup founders often overlook key intellectual property concepts and provisions in their business arrangements and contracts.  This is particularly true for those who self-incorporate through LegalZoom or similar sites.  While some of this can often be cleaned-up by a corporate attorney after the fact, this is not always the case.  And, sometimes, even when it is, doing so presents a costly drawn-out diversion of time, energy and resources.

From the experience of DPA Law APC’s attorneys advising startups and small businesses with key business contracts and service provider relationships, these are the top three intellectual property contracting errors startup founders should strive to avoid:

  • Failing to Transfer IP From Founders To The Company: When a project idea progresses from informal discussions among the core group toward something more tangible, like a high level strategic development plan, or organizing the startup entity, it is time to contact an experienced corporate lawyer. This can help ensure that the key IP is properly assigned by the founders to the company to minimize conflict later about who owns what when one of the founders falls-out and leaves. It is customary that each founder, if she or he has not already done so, in fact assign all project IP rights to the company as full or partial consideration in exchange for his or her receipt of their founder's shares.
  • Using  Former Or Present Employer's Resources: If you, as an early startup founder or contributor, are still working elsewhere while working on your startup, it is critical that you not use your employer's laptop, email, technology or other resources for your startup's work - or work on your startup on company time, regardless of whether you are on lunch break or not. In California, and like most states, founders who use their employer’s time, equipment, resources or facilities to work on a side projects run the risk of clouding ownership to the side-project's IP.
  • Compromising IP Ownership Developed by Contractors:Startup founders are sometimes unaware of the importance of having a written contract with a so-called work-for-hire clause that assigns the IP created by IP developers to the company. Because the exact role of early contributors is often quite uncertain, perhaps 'friends' making early development contributions, formal written agreements often go unaddressed. In this circumstance, the founders' company might end up with a copy of the technology delivered, but no ownership of its underlying IP rights. This is why it’s important to make sure all contributors -- particularly at the early startup stage when virtually no-one is a paid employee, have independent contractor development agreements supported by valid consideration.  These agreements should provide that the work is on a ‘work-for-hire’ basis and reflect a present, proper assignment of the IP created and to be created to the startup. A well-drafted agreement also includes in-term and post-term confidentiality stipulations.
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