IP Ownership Chain Integrity

Does Your Company own its Code/IP?

Founders, securing airtight proof of intellectual property ownership is the single most critical step in protecting the venture's underlying value and commercial defensibility. And it should be done as early as inception.

Because a company's code, designs, and patents form the foundation of its enterprise valuation, investors and acquirers demand clear chain-of-title documentation before deploying capital.

Failing to secure signed Confidential Information and Invention Assignment Agreements (CIIAAs) or Proprietary Information and Invention Assignment Agreements (PIIAAs) from every founder, employee, and contractor leaves the entity's core IP legally stranded with the individual creators.

This dynamic introduces immense legal risk during due diligence, as a disgruntled former developer could easily leverage an unassigned line of code to derail a transaction or claim partial ownership of the enterprise.

Ultimately, these unhedged IP leaks present a fatal title defect that routinely causes institutional VCs to walk away from venture rounds and halts strategic acquisitions dead in their tracks.

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Transcript:

Lindsey Mignano:

One of the questions we routinely get asked, especially when we're dealing with multi-founder teams or people who are relatively close to incorporation, and maybe this is their first time doing a startup, is the question about engineers and the ownership of the IP that they create for the company, specifically the code, which is the backbone of a lot of companies. Most founders sometimes think they own the what they create for their company, but give us a weigh-in here.

Phil Omorogbe:

You're right, Lindsey — a lot of founders come in thinking that they own everything, and this is their first assumption, and it's not usually the case automatically. So I want you to think about your IP like title to a house. So investors and acquirers, they want an unbroken chain proving the company owns every piece of product. And the two gaps that we typically see come in this form.

The first is with contractors. A lot of founders assume that if they paid for the code, they automatically own it. And for software, that's just not how U.S. copyright law works. The default rule is whoever writes the code is the owner, unless they've signed it over to you in writing. So if you have that overseas dev shop or freelancer who built it, if there's no written assignment, and this is what we call the Confidential Information and Invention Assignment Agreement. If you don't have the CIIAA signed, then it's possible that your company may not own the code. Instead, the contractor who wrote it does.

And one more thing: to an investor, an unsigned contractor is clouded title. They really don't like this. So it quietly suggests you don't actually own the thing you're selling. And this is one thing we advise every founder who's working with a contractor, employee, et cetera: you need to make sure that this is signed.

Lindsey Mignano:

What if you're a startup, and maybe you incorporated online and you hired some independent contractors here and overseas, but you never got them to sign this important document, they weren't a part of incorporation. What's the fix here?

Phil Omorogbe:

The fix is we will draft this CIIAA for them and just have them sign everything that they've made with the company, up until this date. This doesn't necessarily mean that if they've built things before you get them to sign, it can't be covered; we can retroactively add this into the CIIAA. So what I would say is definitely get in contact with your lawyer. This is definitely a situation you want to fix sooner rather than later.

Lindsey Mignano:

Awesome, thanks so much. if you have any questions, feel free to comment.