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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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Should Start-ups Utilize the Blockchain Over Deal Lawyers?

In the current model of American commerce, business attorneys are uniquely situated between firms and opposing parties. A great deal of an attorney’s utility comes from her experience with deals and position as a utility player. But have we considered how recent innovations potentially threaten this traditional model?

Blockchain is the generic name for the technology underpinning Bitcoin, the world’s most notorious cryptocurrency. It is a distributed public ledger system. Transactions are recorded on a comprehensive and always up-to-date public register that every bitcoin enthusiast can download and verify. Those familiar with cryptocurrency know that not even a single tangible bitcoin exists. Rather, “possession” of bitcoin is determined by a continuous barrage of 1s and 0s revolving around a common ledger. That’s about all one needs to know about bitcoin to understand how the blockchain could be applied to transactions generally.

Smart Contracts are another potential implementation of blockchain technology in addition to cryptocurrency. Blockchain software code can represents an arrangement or contract. The computer can make and execute automatically under conditions set in advance. It doesn’t end there — the system could execute bundles of agreements, all linked to each other, operating autonomously and automatically. The vanilla version requires that all the links in a contractual chain need to execute. For simplicity, I’ll focus on a simple one step transaction between a buyer and seller.

A case study for how this could work in practice is to look at Amazon smart lockers. When a consumer on Amazon’s retail store purchase an item and elects to utilize a smart locker, the item is shipped to a predetermined location — the locker — and the customer arrives, verifies his identity and takes possession of the good. The consumer experience could be identical with the blockchain. Rather than rows of computer hardware running Amazon’s web services, the decentralized ledger system could run a near constant accounting of who has paid for certain goods and services. For example, consider if the local ice cream maker needs to make monthly purchases of dairy from the dairy farmer several counties away. The ice cream maker can avoid the time spent physically contacted the farmer or an agent of the farmer every month to verify the deal is still on. Also, the ice cream maker could avoid any risk that the farmer could not deliver.

An example of how this could play out is like the Amazon smart locker solution. Consider the farmer usually delivers dairy to a group of merchants in Washtenaw County. Rather than verify every transaction, the farmer could arrange for a neutral site to store the commercial dairy. That site could be outfitted with locks connected to their own private blockchain. Once the farmer’s bank receives payment for the dairy it could send a digital receipt back to the merchant; this key would then unlock the merchant’s unique locker when she presented identification at the locker.

This is a simplified example and the point of service could look a lot different whether the solution is taken up by private companies like Amazon or municipalities consider operating their own blockchain infrastructure. The point is to consider where do lawyers fit into all of this? According to Jeff Garzik, co-Founder at Bloq, a blockchain services startue: none at all. “Smart contracts … guarantee a very, very specific set of outcomes,” he observed. “There’s never any confusion and there’s never any need for litigation. It’s simply a very limited, computer-guaranteed set of outcomes.” Mr. Garzik is undoubtedly discounting the propensity for things to go wrong in a deal, but there may be some potential for this to be the reality. It merits attention from the legal profession and law schools.

For low level, standardized agreements (like purchasing from a dairy farmer) the lawyer’s role would likely be one of overseeing the system and arbitrating any disagreements that may arise. This may require a baseline understanding of the technology in addition to solid understanding of commercial law.

The upshot: the end may not come swiftly. While this may eventually lead to a long run decrease in the demand for legal services for some types of transactions, it’s important to note that this is part of a longer trend of technology reducing transaction costs. Qualified lawyers will always be able to provide intangible services like effective counseling and guidance to small businesses. That will remain indispensable despite any foreseeable technologic advances. Corporate attorneys command high fees for the work they do with very sophisticated parties crafting bespoke agreements. At the low end, some contracts have been becoming more standardized, a la Legal Zoom. But nothing about smart contracts in its current form presents an issue for transactions driven by complexity.

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How to Find Software Development for a Minimally Viable Product

 

Startups often find themselves in search of developers for their minimally viable prototype.

Startups often find themselves in search of developers for their minimally viable product.

A common issue for startups is where to find software development services to create a minimally viable product.  In lean startup methodology, a minimally viable product is a product with the minimal feature set needed to gauge customer needs.  Generally speaking, startups have three options if they do not already have a software developer on their team:

1.  Find a Technical Co-Founder – A startup may consider finding a software developer that would be a good fit to take the role of a technical co-founder.  This would typically require finding a software developer willing to make a full-time commitment to your startup.  Startups should also look for a good alignment of values, personality, and interests with a potential founder.  The trouble with this strategy is that it might take time to find, and become comfortable with, a suitable co-founder.  The diligence needed to find a co-founder may be inconsistent with a startup’s timing for developing a minimally viable product. The main benefit of having a co-founder capable of leading the development of a minimally viable product is that it is easy to make the necessary iterations to the product based on what a startup learns from its customers.  A technical co-founder is typically initially incentivized with founder’s equity, subject to a standard vesting arrangement.

2.  Use Independent Contractor Developers – If a startup does not have a technical co-founder, or if that co-founder needs additional assistance in creating a minimally viable product, a startup can often engage individual software developers through an independent contractor relationship.  These programmers should sign an independent contractor agreement or software development agreement with terms covering IP assignment, deliverables, and payment.  This relationship benefits the startup because it provides quick software development services for a minimally viable product, yet doesn’t commit the startup to a long-term relationship.  Also, because these independent contractors will be familiar with the startup’s technology, they may be available to tweak and improve the code based on customer feedback.  Independent contractors can be compensated with pay or with relatively small chunks of equity.  An additional benefit of this arrangement is that it could serve as a trial run for a potential technical co-founder.

3.  Use of Professional Software Development Providers – There are also companies that specialize in software development.  These companies range from high-end providers with extensive software development bandwidth and expertise.  These providers may take equity compensation from certain clients but will typically require monetary compensation in the ten’s of thousands of dollars. Smaller development firms may be less expensive or more willing to accept equity a full or partial compensation.  The drawback of using a development firm is it might be harder and more expensive to use that firm for the necessary iterations required after customer feedback.  Most firms will use their own developer-favorable agreement to cover the services they will provide, IP ownership, and payment terms.