I was pleased to contribute this guest column to The Wall Street Journal’s Small Business section on May 10, 2012. This excerpt contains some added hyperlinks; a link to the full article at WSJ.com appears below after the break. Thanks to editor Vanessa O’Connell.
5 ‘IP’ Mistakes Start-ups Should Avoid
Venture capitalists, angel investors and start-up lawyers these days tend to be obsessed with “intellectual property,” or IP.
And for good reason: In the information economy, the core assets of a new venture are likely to be talented people, the IP they create, and little else.
To maximize future value, founders should try to lay a solid IP foundation even before a new start-up is incorporated. Here are five common mistakes to avoid:
Perhaps the single greatest source of IP anxiety in Silicon Valley stems from the fact that engineers and executives tend to build on what they know best when starting a new venture.
If a former or “day job” employer can lay any claim to the IP upon which a new start-up is built, that claim, however tenuous, injects risk into the venture. And that risk grows in magnitude over time proportionate to the success of the business.
A classic example is the so-called “Winklevoss Twins problem” made notorious by the movie “The Social Network.” Some degree of ambiguity regarding IP ownership may be inevitable, but if a sliver of equity must be granted to settle the dispute, it makes quite a difference if the “sliver” is in a company worth $1 million or $100 billion. In Facebook’s case, the settlement netted the Winklevoss brothers stock worth many millions of dollars.
Of course, such disputes are rarely litigated except when the new start-up turns out to be a big success, in which case everyone scrambles for a piece of it.
2. Mixing up what came from where.
IP rights ordinarily belong to the individual who creates the work unless the creation occurs as part of the person’s job, a so-called “work for hire.”
One common mistake is to use a non-employee contractor or consultant to produce work without obtaining the necessary assignment of IP rights to the client company.
After the contractor has been paid, the company’s leverage to coax him or her into signing more legal documents is more or less gone.
This all gets complicated, thanks to the natural fluidity of start-ups as business enterprises: A software developer may have started out tinkering with a side project during evenings and weekends, bring some of that knowledge or code to bear on a consulting engagement with a colleague who founded a startup, and ultimately join the team as a co-founder or one of the first employees.