IP Assignment: How to Ensure Your Company Actually Owns Its Technology

The IP Ownership Problem Is More Common Than You Think

When a startup's investor or acquirer conducts due diligence, one of the first things their lawyers examine is IP ownership. The question is simple: does the company own all of the intellectual property in its product? The answer, for a startling number of startups, is: not entirely.

The gaps are usually not malicious — they're the result of founders not understanding the legal default rules for IP ownership. Under U.S. copyright and patent law, the default owner of intellectual property is the individual who creates it — not the company they work for or contract with, unless specific requirements are met. Closing these gaps requires written IP assignment agreements, executed before the problem becomes apparent.

The Three IP Ownership Gaps

1. Founder IP

In many startups, one or more founders created key intellectual property — software code, algorithms, designs, written content — before the company was formally incorporated. Under the default rules, that IP belongs to the individual founder, not the company. Even after incorporation, if the founder hasn't signed an explicit IP assignment agreement, the company may not own what it needs to own.

This gap is most dangerous at the funding and acquisition stages. A company raising a Series A round, or being acquired, will typically need to represent and warrant that it owns all of its material IP. If it can't make that representation cleanly, the deal may be delayed, repriced, or — in extreme cases — killed.

The fix: Every founder should execute a Proprietary Information and Inventions Assignment Agreement (PIIA) or similar agreement at or before incorporation, assigning to the company all IP they've created in connection with the business.

2. Employee IP

For employees, the legal analysis depends on the jurisdiction and the circumstances. Under the "work made for hire" doctrine, works created by employees within the scope of their employment are owned by the employer. But this doctrine has important limitations: it applies to work created within the scope of employment, and courts sometimes find that work done outside regular hours, on personal equipment, or beyond the employee's job description falls outside that scope.

The reliable solution is a written IP assignment in the employment agreement. Every employee — from founding engineers to later hires — should sign an agreement that explicitly assigns to the company all IP they create related to the company's business, whether during or outside work hours.

Watch for: Many states (including California, Delaware, Illinois, Minnesota, North Carolina, and Washington) have statutes limiting the scope of employee IP assignment clauses — specifically, they prohibit employers from claiming IP developed entirely on the employee's own time, without company resources, and unrelated to the company's business. Louisiana does not have such a statute, but agreements should be carefully drafted in any state.

3. Contractor IP

This is the most commonly overlooked IP ownership gap. When a company hires an independent contractor — a freelance developer, a design agency, a consultant — to create intellectual property, the default rule is that the contractor owns what they create, even if they're paid specifically to create it for the company.

The "work made for hire" doctrine applies to contractor work only in limited circumstances: specifically, when the work falls into one of nine enumerated categories under the Copyright Act and the parties have a written agreement designating it as work made for hire. Software code is not in the enumerated list, which means software developed by a contractor almost certainly does not become the company's property under the work-for-hire doctrine alone.

The reliable fix is simple: every contractor agreement should include an explicit IP assignment clause transferring all IP created under the agreement to the company, along with a work-for-hire designation. This two-belt-and-suspenders approach ensures the company's ownership is secure.

Open Source Software: A Special Consideration

Startups that build on or incorporate open source software must carefully review the license terms governing each open source component. Open source licenses range from permissive (MIT, Apache 2.0 — allowing commercial use with minimal restrictions) to copyleft (GPL — requiring that derivative works also be released as open source). Incorporating GPL-licensed code into a proprietary product can create significant legal exposure. A thorough open source license review is an important part of any IP audit.

Conducting an IP Audit

The right time to conduct an IP audit is before you need one — before a funding round, before an acquisition process, and before bringing on major investors or partners. An IP audit reviews the company's IP assets, identifies any ownership gaps, and addresses those gaps through retroactive assignments or other remediation.

The Rhodes Law Firm regularly conducts IP audits for startups and growing businesses, identifying and addressing IP ownership issues before they surface at the worst possible moment.