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Why Do Technology Startups Need IP Assignment Agreements?

If you are considering forming a startup, an intellectual property (IP) assignment agreement will be crucial for your company, especially if your company wants to get financing from outside investors in the future. An IP assignment agreement is a contract that transfers an individual’s rights to an intellectual property (for example, patent, trademark, copyright, etc.) to another legal entity, such as a company. You and your colleagues may want to ask: why do you need to transfer your intellectual property rights to your company?

 

What are the consequences for not having an IP assignment agreement?

If individual inventors do not assign the IP rights to the company, it will be very difficult for the company to seek investment in the future, because an investor will not fund a company that does not have the complete ownership of its intellectual property assets. Therefore, the IP assignment agreement will be a key document that the investor will look for before deciding whether she will fund the company.

Imagine two inventors jointly own a patent. An obvious concern for potential investors is whether this patent can be effectively protected against infringement. However, if the patent is involved in patent infringement litigation, both co-owners must join the lawsuit so that the suit can be filed. Either owner’s lack of interest in joining the litigation will make the patent meaningless because the patent can be easily infringed. In contrast, if a sole owner, the company, owns the patent, the company itself can bring this suit. This is easier for protecting the patent because the company does not need to get every owner’s consent to bring the suit.

Additionally, the value of the patent will be diluted if it is jointly owned by several owners. Each co-owner of the patent can independently exploit, without consent of, and without accounting to, the other co-owners. Because a license is available from more than one party, its value is inevitably diluted. Otherwise, if a potential licensee wants to get an exclusive right to the patent, it must negotiate with all owners, and the holdout problem (where one party’s withholding of support prevents a deal) is likely to occur.

 

What provisions need to be included in an IP assignment agreement?

Because the IP assignment agreement is critical to a company, the agreement should be drafted by a lawyer. Both the Assignor (e.g., the individual developer) and the Assignee (e.g., the company) must carefully review the provisions in this agreement. The most important sections of an IP assignment agreement are:

Assignment of Intellectual Property. This section describes the assignment and acceptance of the intellectual property. If the Assignor agrees to assign the intellectual property in exchange for a consideration, either in the form of cash, equity or royalty, the consideration needs to be clearly identified in the agreement.

Description of the Assigned Intellectual Property. The agreement usually includes a full description of the intellectual property or refers to an exhibit that describes the intellectual property. Notably, the to-be-assigned intellectual property sometimes includes goodwill, which is the intangible value of the intellectual property. The assignment of trademark’s goodwill is particularly important because it includes the brand’s reputation and recognizability.

Warranty. It is especially important to have the Assignor warrant that she has the capacity to assign the intellectual property. Otherwise, the assignment may not be effective.

An IP assignment agreement is crucial for showing your startup’s future investors that the company possesses valuable intellectual properties. Therefore, soon after your company is formed, remember to ask everyone who may have a right in the intellectual property, including inventors, employees, independent contractors and so on, to sign the IP assignment agreement.

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