A startup’s most valuable asset is usually its intellectual property (IP). If your business gains traction, you can commercialise your IP, for instance, your brand’s trade marks, domain name and patents. It’s then important founders turn their attention to intellectual property protection from the beginning. We set out four rules to help you avoid any common IP traps.
Rule 1: Individuals Should Assign All IP to the Company
In the startup’s infancy, founders commonly work on the business as individuals with no formal business structure in place. As the business takes shape, founders should set up a company and this company should own all the IP.
Founders are likely to own any IP they created before registering their company. As such, founders should transfer all their IP to the company with an IP Assignment Agreement. As shareholders of the company, the founders will still receive value from their IP.
The company should own any IP that employees or contractors create as part of their role. All employees and contractors should sign an employment agreement or contractors agreement which includes an IP Assignment clause. An IP assignment clause gives the employer ownership of the work an employee produces. This means that if any employee leaves the business, any IP they created during the course of their employment belongs to the company.
Third Party Contributors
Startups may engage a third party to develop IP on their behalf, for instance, an IT developer or copywriter. Similarly, startup founders should ensure that the third party transfers the IP that the business intends to use to the company.
Rule 2: The Operating Company Should Not Hold the IP
Many startups will establish a dual company structure for asset protection reasons. This involves incorporating a holding company and operating company. The purpose of these structures is to hold the valuable assets of the business — usually cash and IP — separately from the company which enters into contracts and potentially incurs liability.
If you begin by registering two companies for your company structure, the founder, employee or third party will then transfer the IP to the holding company.
Many startups don’t decide they want a dual company structure until after they have established their first company. In these circumstances, it’s common for the startup to transfer any IP the first company holds to the newly incorporated operating company.
Rule 3: Licence Your IP
The holding company has the exclusive right to exploit any IP it owns. If another company — like a subsidiary — wants to use a trade mark, then the holding company would need to licence the IP. Unlike an IP assignment, which permanently transfers the IP rights to the other company, licensing gives the licensee the right to use the IP for a certain time in specific circumstances.
Aside from transferring IP from a holding company to the operating company, a startup may also need an IP licence agreement for a joint venture or marketing arrangement. The agreement should define permitted use and ensure that all ownership control and ownership rights remain with your company.
Rule 4: Register Any Important IP
If you have a trade mark, design or invention, you should consider your registration options. Registration gives you ownership rights and make these much easier to enforce in circumstances of infringement.
A registered patent or trade mark is also very valuable for the business if you are looking to bring on investors or sell. Registration, however, comes at a cost and you should view this as an investment. If funds are tight, choose the IP which has the most value to your business. It’s also more cost-effective to limit registration to the countries which you require protection in now or in the near future. Once your startup has more cash flow, you can always expand this protection.