As a startup, your intellectual property (IP) is likely to be one of the most valuable assets in your business. Startup founders should ensure that they assign their IP rights to the company they create. Otherwise they risk compromising the business’ future growth. In this article, we set out four significant reasons why it is in the business’ best interests for founders to assign their IP rights to the company.
1. Proper Structuring of the Business
Many startup founders will dive headfirst into developing their ideas to see if they have commercial potential. As a result, it is common for founders to have already developed some IP by the time they set up their business’ legal foundations and incorporate a company. Therefore after incorporation, founders need to make sure they assign their IP to the company. This is because the startup is now the company entity, rather than you and your co-founders as individuals.
Instead of a single company, you may choose to set up a dual company structure. This means that valuable assets are contained in a holding company, while day-to-day operations are conducted by an operating company. If you use this structure, make sure the founders:
- have assigned IP to the holding company; and
- there is a licence for the operating company to use the IP.
2. Preventing Disputes
It is important for startup founders to assign their IP to the company. This is because the departure of a co-founder can threaten the progress of your business.
Although you and your co-founders may see eye-to-eye at the early stages of developing your business idea, unfortunately, circumstances may change. If your co-founder leaves the business, and no IP assignment has been made, they may have grounds to claim the IP they developed before the incorporation of the company is theirs to take.
The last thing you would want is for your co-founder to take valuable IP with them. This would leave your business with no ability to move forward and potentially a new competitor in the market.
3. A Risk When Raising Capital
When scaling your business, you will probably seek external investors to help fund their growth. Investors often come on board as co-owners and shareholders of your company. They usually conduct due diligence to ensure that the risk of investing in an early-stage startup is worth it.
As part of their due diligence, they will look at whether the company actually owns its most valuable assets. This is because they will want to assess the potential of successfully commercialising your IP. But if it turns out your company does not actually own that IP, then the value of your business decreases significantly.
Therefore, at worst, not assigning IP to the company can jeopardise external investment into your company. At best, sorting out your company’s IP ownership at the last minute can postpone a capital raising round, which can already be a stressful time.
4. Risking a Future Acquisition
Confirming IP ownership will also be an important factor if another company is interested in acquiring your business.
Any potential acquirers will want to confirm the value of the prospective purchase. Part of that involves checking that the company owns critical IP. When the acquirer takes over, they will want to ensure that they can continue to operate and grow the business. Your potential acquirer will not want to risk you and other founders leaving the company and taking the IP with you.
If the due diligence process uncovers that IP was not effectively assigned to the company by founders, this may impair or jeopardise the acquisition.
How to Assign IP to the Company
You can assign your IP to your company using an IP assignment agreement or deed. You can specify that this agreement will relate to all the IP owned by founders which relates to the business.
The deed assigns all current and future rights in the IP to the company. It would also state that any future IP rights that relate to the assigned IP automatically vest in the company.
Formally assigning IP to your company after incorporation may seem like an additional administrative burden. But it is actually a critical step for your future success. If the company does not own valuable IP, this can turn away potential investors and acquirers, or result in complicated disputes if a co-founder leaves. If you need assistance in preparing a founder’s IP assignment deed, contact LegalVision’s IP lawyers on 1300 544 755 or fill out the form on this page.
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