IP Basics
One major concern for VCs and founders is IP ownership transfer. Proper IP ownership transfer from the founders and employees is crucial, and any IP ownership issues need to be fixed ASAP. Much of the value of a tech company is in the IP it’s developed, and IP ownership transfer is always examined during due diligence for financings, IPOs and M&A for this reason. Additionally, companies can’t sue for IP infringement of their company inventions if the employee never assigned their rights to the company. Here, I’ll discuss common issues around IP ownership transfer and how to properly get it done.
Founders must have a clean break from their employers, and reviewing the employment agreement and any separation agreement or termination certificate is important in understanding if there are any non-competes or non-solicits to be aware of. And of course, founders should not be working on their new company on a prior employer’s computers or during their employer’s working hours, as that can affect IP ownership. They should also not bring in any information, work product, or documentation from their prior employer to the new company (which can result in breach of confidentiality and trade secret misappropriation claims).
Usually, founders have worked on their company for some time before incorporating or before signing the employment agreement. All that work technically still belongs to the founders until the IP rights are assigned to the company. In that case, the employment agreement must have a clause assigning all IP rights in that work to the new company, and it's often in an exhibit titled “Proprietary Information and Inventions Assignment Agreement” or PIIAA. Note that the proper language covering this work is slightly different from IP assignment for ongoing work, described below.
The IP assignment clause most people are familiar with is assignment of ongoing work for the company, which should also be in the PIIAA. This assigns all IP rights to work created as part of employment to the company, on a going-forward basis. To be effective, it must be properly written, containing present assignment language and a work made for hire clause.
Present assignment language is written in the present tense and assigns all IP rights to the company. Phrases such as “I hereby assign”, “agree to grant and does hereby grant”, stating that inventions “shall belong” to the employer, and that the employee “hereby transfers, conveys and assigns” are deemed to be sufficient by the courts to assign all future work to the company. This language should encompass inventions and discoveries and use broad language to include work that may or may not be copyrightable or patentable, in addition to patents and patent applications.
However, any assignment language using the future tense, such as “agree to assign” or “will be assigned” requires an additional agreement down the road that documents the actual assignment. When future tense language is used, IP rights are not assigned to the company through the PIIAA, and this language should be fixed ASAP.
Work made for hire language is often paired with present assignment language, and encompasses certain copyrightable works. A work made for hire clause means that the work automatically belongs to the employer upon its creation, but only for certain copyrightable works, and only in certain circumstances. Work made for hire and present assignment language are usually written together to cover IP ownership issues across copyright, patents, and trademarks, while confidentiality clauses in PIIAAs cover disclosure and use of trade secrets.
