Founders should transfer their intellectual property to their startup at formation, typically when they receive their founder stock, and every employee and contractor should sign an IP assignment before starting work. Waiting creates real risks: a co-founder can leave still owning key code, a former employer or university may claim rights, and investors will flag gaps in due diligence. The usual tools are a founder technology assignment (or a contribution of IP in exchange for stock) and a confidential information and invention assignment agreement for everyone else.
Many founders start building before they incorporate, often on nights and weekends, sometimes while still employed elsewhere. Until there is a written assignment, the founder, not the company, generally owns what they created. Here is when and how to fix that.
Why Timing Matters
Ownership of IP generally starts with the person who created it. A company owns IP only if it was created by an employee within the scope of employment (for copyrightable works) or if the creator signed a written assignment. That means a newly formed startup may own very little until its founders sign the right documents. Transferring early helps avoid several problems:
- Founder departures. If a co-founder leaves before assigning, the company may need that person’s cooperation, and may have to pay for it, to secure rights to its own product.
- Disputes among founders. Unclear ownership is a common source of founder disputes.
- Investor diligence. Investors and acquirers routinely ask for signed assignments from every founder, employee and contractor who contributed to the core technology. Gaps can delay a financing or reduce a valuation.
- Tax and valuation complications. Contributing IP at formation alongside the founders’ stock purchase is usually straightforward. Contributing valuable IP later, after the company has outside investors, can raise valuation and tax questions.
How Founders Transfer IP
At formation, each founder typically signs a stock purchase agreement and either a technology assignment agreement or a provision in the stock purchase agreement that transfers pre-formation IP to the company, sometimes as part of the consideration for the shares. Many founders also sign a confidential information and invention assignment agreement covering future work. Points to get right:
- Describe the IP broadly. Cover code, designs, domain names, trademarks, business plans, inventions and know-how related to the business, not just a single named project.
- Use present assignment language. Words like “hereby assigns” transfer rights immediately and automatically as they arise. A promise to assign in the future (“agrees to assign”) can leave ownership in doubt, as the U.S. Supreme Court’s decision in Stanford v. Roche illustrated.
- Get spouses’ consent where useful. In community property states such as California, a spouse’s consent can help reduce later claims.
- Coordinate with vesting and the 83(b) election. Founder stock is often subject to vesting, and a timely 83(b) election is usually filed within 30 days of the stock grant.
Check for Competing Claims
Before assigning, founders should consider whether anyone else may already have rights:
- Current or former employers. Many employment agreements assign inventions related to the employer’s business, or created using its time or equipment. California Labor Code Section 2870 limits an employer’s ability to claim inventions an employee develops entirely on their own time without the employer’s equipment, supplies, facilities or trade secrets, but the protection does not cover inventions that relate to the employer’s business or result from work performed for the employer.
- Universities. University policies often claim inventions created with significant use of university resources or under sponsored research. A license from the university may be needed.
- Co-creators and contractors. Anyone who wrote code or designs before formation, including friends and freelancers, should sign an assignment too.
- Open source. Review open source licenses for obligations that could affect proprietary code.
Employees and Contractors
Every employee should sign a confidential information and invention assignment agreement (CIIAA) on or before the first day of work. In California, the agreement must include the notice required by Labor Code Section 2872 explaining the Section 2870 limits. See what you need to know about CIIAAs.
Contractors require extra care. Under the Copyright Act, work by an independent contractor is a “work made for hire” only in certain categories and only with a signed writing, so most software and design work by contractors must be assigned. In California, including work-for-hire language in an agreement with an individual contractor can have employment law consequences, so contractor agreements usually rely on a present assignment instead.
Record and Maintain the Transfer
- Record patent assignments with the USPTO. Recording within three months of the assignment, or before a later purchase, protects against later conflicting transfers.
- Assign trademarks together with the associated goodwill and record the transfer.
- Move domain names, app store accounts, code repositories and cloud accounts into the company’s name.
- Keep signed copies of every assignment in the company’s records for diligence.
What If You Missed It?
It is common to discover gaps before a financing. The fix is usually a confirmatory assignment signed by the founder, employee or contractor, sometimes with additional consideration. Fixing gaps is easier while relationships are good, so do it as soon as the gap is found.
The Takeaway
The right time to transfer IP to your startup is at formation, and the right time to get assignments from employees and contractors is before they start. Clear, present-tense assignments, checks for employer and university claims, and good recordkeeping protect the company’s most important assets and make fundraising smoother.
Frequently Asked Questions
Do I own the code I wrote before forming my startup?
Generally yes, unless you assigned it to someone else, such as an employer. The company will not own it until you sign a written assignment, which is usually done at formation.
Can my current employer claim my startup idea?
Possibly. Many employment agreements assign inventions related to the employer’s business or made with its resources. California Labor Code Section 2870 protects some inventions made on your own time and equipment, but not those that relate to the employer’s business.
Is a work for hire clause enough for contractors?
Often not. A contractor’s work is a work made for hire only in limited categories with a signed writing, so most contractor agreements need a present assignment of rights. In California, work for hire language with individual contractors can also raise employment law issues.
What if a co-founder left without assigning IP?
The company may need to negotiate a confirmatory assignment, sometimes for additional consideration. Review any agreements the co-founder signed, because a stock purchase or other agreement may already contain an assignment.
How Sutter Law Can Help
Sutter Law helps founders with business formation, founder stock and technology assignments, CIIAAs and contractor agreements, and IP cleanup before financings. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
