Startup founder agreements has been the top post on my blog for a long time. The post has become much more valuable due to the many interesting questions & situations described in the comments. Every now and then, a comment merits its own post:
I have a question regarding IP rights.
I came up with a concept for a new start-up and the main feature. That particular feature I came up with was during a chat to one of my start-up partners.
The question is whose idea is it and who owns an IP for it? I feel I came up with it, but it did not happen by itself, it was triggered by conversation.
I would like to be fair.
This situation comes up frequently in one of the following two forms:
- A friend helps you come up an idea and start a company. She joins in with you. How much was her help worth? Does she own part of the idea or not?
- Continuing from the previous example, after unsuccessfully trying to raise money, you decide to shut down the company. Who would own the idea after the company is shut down?
I call it The Muse Problem. In Greek mythology, the Muses were the goddesses of inspiration in arts & science, catalysts of creativity and invention. If a muse helped a songwriter create a great song, how much of the song’s royalties should the muse get?
Is this and the question of how much of an idea a startup founder’s muse owns there are at least four separate ways of looking at the situation:
- Letter of the law. There is a legal standard as to what constitutes full IP ownership. I will not pretend to fully understand it but the gist is that it requires non-trivial input for someone to co-own IP with you. Just being in the same room is not good enough. What about if the idea came from a conversation? What about many conversations? If the conversation(s) were specifically about IP/idea generation, I can tell you that in every single case I’ve approached a lawyer for advice the answer was, “it’s depends.” In every other case they’ve said, “no worries.”
- Practice of the law. In theory, theory and practice are the same. In practice, they are not. Assume for a moment that you thought you owned 100% of the idea and that, given perfect information, the letter of the law would be that your friend co-owns the idea with you. She finds out about it and she gets really upset and she hires a badass lawyer and they come after you or, if the IP is now owned by your company, your company. What’s the worst that can happen assuming they can prove their case? If the idea has generated significant value, there could be some liability. How much would depend on how the case goes. If you’ve filed a patent on the idea without disclosing your (now former) friend as a co-inventor then the patent could be invalidated. In practice, however, there are so many ifs and buts along the way starting with the likelihood that your friend probably doesn’t think she owns a part of the idea, going to the fact that most ideas don’t generate enough value to justify lawsuits and ending with the observation that proving a case of wrongdoing may not be easy.
- Industry practice. In industry practice, for better or worse, most high-tech founders do not share any portion of their IP with the muse or muses who do not join their startup. It’s just part of how high-tech operates. I don’t have great data about other fields.
- Your practice. In your life, you have to decide what’s fair and how you will feel about your actions down the road. There is no right answer and, most likely, nobody will call you out if you do nothing.
The second case, when a company shuts down, is essentially equivalent. If company intellectual property is not a collateral someone can lay a claim to, it reverts to it owners prior to incorporation. If the intellectual property was created inside the company, e.g., when three employees file a patent, the IP goes to the inventors and is shared equally. The equal sharing I honestly find a little random but it’s very rare that the IP would be worth anything. If it were, someone would try to buy the company for the IP.
Back in 2008, I worked with a friend for many months to incubate a company and then, after the crash and after failing to acquire another company’s technology for what we thought was a fair price, we decided that it didn’t make sense to raise money. I had created a significant amount of intellectual property during that period. My friend was not technical and took no part in the actual IP creation but he was my muse and our conversations helped me think through things. I reached out to him and offered him a significant share of future IP proceeds. I did it for two reasons. First, it was the right & fair thing to do. Second, our agreement eliminated legal risk for any third parties interested in the IP down the road and, consequently, increased the value of the IP for me and my friend.
Here is the template for the agreement letter that we used:
As you know, I am now planning to go forward with trying to pursue protection for the PERPETUAL MOTION concept that we’ve discussed. I wanted to recognize your contribution and to confirm that it is my intention to have you share X% of proceeds from the sale or license of the patent I file on this concept.
I plan to seek patent protection on the high level concept that I presented to you originally. At this point I do not believe I need to have you execute any patent application. However, I would ask that you agree to cooperate in this regard (at my expense) in the event it becomes necessary.
I believe it is also the case that your prior contribution to the project was done on your own time and expense, and further that all information and ideas you have provided me were done outside of any employment or other obligations you might have or owe to any third party.
Please indicate your confirmation of these terms by signing this letter and returning it to me at your earliest convenience.
Caveat: I am not a lawyer and if you are in a situation like this, you may want to seek professional advice. This is not just CYA language, it’s what I’ve done more than once in the past.
The Muse Problem comes up in one other situation: when co-founders are wondering how to split up a cap table. In this case, however, the real question is not how much of the idea anyone owns but how much of the total capitalization of the company is the idea worth. Ideas without smart & hard-working people who can execute them and adapt them to new circumstances are not worth that much.