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The Startup IP Collaboration Conundrum

by Jackie Hutter

The Startup Collaboration IP Conundrum arises at the founding stages of a company when a group of enthusiastic entrepreneurs come together to build and test a new business idea without first fleshing out issues regarding ownership of the resulting IP. Typically, a group of people with different skills will decide to collaborate and will initially work diligently on the project for a while with the goal of building a viable startup company. The excitement of starting a new venture often wears off soon, however. Team solidarity will fracture when one or more of the startup co-founders is found to be lacking in skills, personality or some other feature deemed relevant to their being a useful team member over the long term. Alternatively, a co-founder may decide that the startup is not a good long-term fit for her. The other co-founders will then seek to exclude that person from the company, presumably with the intention of excluding the ex-co-founder from enjoying any upside value in the startup. In the absence of an agreement that defines the ex-co-founder’s rights–which unfortunately is more often than not the case in the early stage startup world–the excluded co-founder will not go away quietly and ownership disputes must ultimately be resolved. This famously happened with Facebook, Snapchat and, more recently, with the Atlanta-based startup Yik Yak. And, the issue arises frequently with less famous companies: as a leading adviser to startups in Atlanta, in the last year I have dealt with an IP issue involving collaboration at least once a month.

When startup collaboration involves patents, the stakes can be even higher than with more general IP rights like those arising in the Facebook, Snapchat and Yik Yak disputes. Under US law, patent ownership resides in those who are appropriately named as inventors, and all inventors will jointly and indivisibly own the resulting patent, absent an agreement to the contrary. Because all inventors must be named for the patent to be valid, you cannot leave someone off the inventor list just because she isn’t around anymore. Indeed, your patent attorney is ethically obligated to perform an investigation into inventorship to ensure that no one is left off.

Joint ownership occurs irrespective of how large or small his contribution to the product was: as long as his contribution is part of the claims of the patent, ownership is equal. This means that each inventor can use or license the patented inventions without accounting to the other owners. A former startup collaborator therefore does not need to take his former colleagues to court to resolve ownership as happened with Facebook and Snapchat, and which appears to be happening with Yik Yak. Instead, to realize revenue from his early stage participation in the founding of a great startup business, the former collaborator can license his patent rights and keep all of the money obtained, even if his contribution to the whole of the company’s product and go-to-market efforts was very minor.

For startups where significant corporate value resides in market exclusivity, patent co-ownership could destroy much of the company’s value. The co-owner can license his patent rights to a company that will then compete, perhaps more successfully, with the startup that originated the business idea. Even without the co-owner’s licensing efforts, investors will likely shy away from co-owned patent rights because of the increased risk to the startup’s longterm business model. As such, it is imperative that companies exercise care to resolve potential invention ownership issues well before investors start the due diligence process.

While the risks of collaboration by startups are high, I am not recommending that entrepreneurs stop collaborating so as to mitigate these risks. Collaboration is how most startups get off the ground and joint efforts between people who are only loosely aligned in the beginning will often drive progress until the company has sufficient customer revenue or financing to go it alone. So, reality dictates that startup entrepreneurs must embrace the risks associated with collaborating–albeit armed with the knowledge needed to prevent potential co-ownership problems.

The best way for startups to avoid potential inventorship issues is to have everyone who is going to engage in technical efforts with you and on your behalf agree to assign their patent rights to the startup company that is intended to own the fruits of the collaboration before the technical development actually starts. Even if a person who is properly named as an inventor walks away from the startup never to be heard from again, the document that demonstrates his intention to assign his rights to the startup can eliminate later questions of co-ownership. In short, having such documentation in your files can virtually eliminate the Startup IP Collaboration Conundrum as it relates to patents. Of course, avoiding the patent co-ownership problem will require you to have the foresight to have a conversation with your collaborators before there are any fruits from the collaboration. This can also often be a hard conversation to have with others, especially if you do not know them very well. But, the downside of not having such an agreement in place will far outweigh the difficulties of getting the agreement in place. Moreover, broaching the question of patent ownership with your collaborators can often provide you with great insights into their short and long-term plans, which, by itself, is great information to generate at an early stage from those you may not know well, but otherwise may be joined with for a long time.

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