Founder IP Assignment Before Fundraising: What To Check Before Signing

What Is a Founder IP Assignment?

A founder IP assignment is a legal agreement where a startup founder transfers ownership of intellectual property (IP) they created to the company. This includes inventions, software code, business plans, logos, trademarks, domain names, trade secrets, and other intangible assets. The purpose is to ensure the company, not the individual founder, owns the core assets that make up the business.

In the US, this is a standard step before getting finance from investors. Investors want to be confident that the company owns all the IP it depends on. If founders developed technology, branding, or other assets before the company was formally incorporated, or outside of their official roles, a written assignment is essential to transfer those rights to the company.

For example, if a founder wrote the initial code for a software platform before the company existed, or registered a domain name in their own name, those assets must be assigned to the company. Otherwise, investors may see the business as too risky to fund.

Why Do Investors Require Founder IP Assignments?

Investors in US startups want to minimize the risk that someone outside the company could claim ownership of its core assets. If a founder retains rights to IP, it could lead to disputes, block future fundraising, or even prevent a sale of the business. Assigning IP to the company gives investors confidence that:

• The company owns all technology, code, and branding assets.
• No founder, former employee, or contractor can later claim ownership or demand compensation.
• The company can enforce its IP rights and defend against infringement.
• Future investors or acquirers will not face unexpected IP issues.

For example, if a company is acquired by a larger tech firm, the buyer will want proof that the company owns all its software and trademarks. If there is no clear assignment from the founders, the deal could fall through or require costly legal fixes.

Most US venture capital and angel investors include a requirement in their term sheets that all founders must sign an IP assignment before closing the investment. This is not required by federal law, but it is a near-universal industry standard.

Some investors may also require assignments from early employees, contractors, or outside collaborators who contributed to the business. If your startup has used freelancers or advisors, make sure their IP is also assigned to the company.

What Should You Check Before Signing a Founder IP Assignment?

Before signing a founder IP assignment, carefully review the agreement and make sure you understand what you are agreeing to. Here is a detailed checklist of what to look for:

1. Scope of IP Covered: Does the agreement cover all relevant IP? It should include inventions, software, trademarks, domain names, business plans, trade secrets, and any other assets you created for the business. Some agreements use broad language like "all intellectual property created in connection with the company." Make sure it is not so broad that it covers unrelated personal projects.
2. Timing: Are you assigning only past IP, or also future inventions? Many agreements require you to assign not just what you have already created, but also anything you develop in the future that relates to the company's business. This is common, but you may want to negotiate limits if you work on other projects.
3. Compensation: Are you receiving any payment or consideration for the assignment? In most startups, your shares or continued role in the company are considered sufficient, but check if there are any specific terms about payment, equity, or vesting.
4. Warranties and Representations: Are you being asked to promise that you own the IP and have not infringed anyone else's rights? Make sure you can truthfully make these statements. If you used open source code or collaborated with others, disclose this to the company and investors.
5. Obligations to Assist: Does the agreement require you to help the company file patents, register trademarks, or defend IP in the future? Understand what ongoing responsibilities you may have, and whether you will be compensated for your time if you leave the company.
6. Exceptions and Exclusions: Are there any carve-outs for IP you developed before working on the startup, or for unrelated side projects? If so, list them clearly in the agreement, usually in a schedule or exhibit. Be specific about what is excluded.

It is best to review the agreement with an attorney who understands startup fundraising and IP law. They can help you negotiate fair terms and avoid unintended consequences. For example, if you have a side project or prior invention that you do not want to assign, an attorney can help you document this properly.

Example: Sarah, a founder, developed an AI algorithm during graduate school before starting her company. She wants to keep the rights to this algorithm for academic research. In her IP assignment, she lists the algorithm as an excluded invention, so the company does not claim ownership.

Common Legal Risks, State Law Differences, and Mistakes

Assigning IP to the company is usually straightforward, but several legal risks and common mistakes can create problems for US startups:

• Unclear Ownership: If founders worked on the business before incorporation, or used outside contractors, there may be gaps in the chain of title. Investors may require proof that all contributors have assigned their rights to the company. If you used a freelance developer to build your MVP, make sure they signed an IP assignment too.
• Prior Employment Agreements: If a founder developed IP while working for another employer, that employer may have a claim. Many employment contracts include "invention assignment" clauses that give the employer rights to anything created during employment, even if done on personal time. Review any prior employment or consulting agreements for IP clauses before signing a founder IP assignment.
• State Law Differences: While federal law covers copyrights and patents, state law often governs trade secrets and contract terms. For example, California law (California Labor Code Section 2870) restricts assignment of inventions developed entirely on your own time without company resources. If you are a California founder, you may have rights to exclude certain inventions from assignment. Other states may have similar or different rules.
• Open Source and Third-Party Code: If you used open source software or third-party libraries, make sure you comply with the license terms. Some open source licenses require you to disclose your source code or restrict commercial use. Failing to disclose this can create major problems for investors.
• SEC and Regulatory Issues: If IP assignments are tied to equity or compensation, they may be relevant to securities law compliance. For example, if a founder receives stock in exchange for assigning IP, the transaction may need to comply with SEC rules for exempt offerings. See the SEC exempt offerings overview for more information.

Common Mistakes to Avoid:

• Failing to assign all relevant IP, leaving gaps that can delay funding or acquisitions.
• Not excluding prior inventions or side projects, leading to disputes later.
• Overlooking the need for assignments from contractors or early employees.
• Assuming state law is the same everywhere; some states have unique rules about IP assignments.
• Signing warranties or representations you cannot truthfully make, such as claiming you are the sole creator when others contributed.

To reduce risk, keep clear records of who created what, when, and under what circumstances. If your company is incorporated in Delaware, you can check company status and filings with the Delaware Division of Corporations.

Negotiation Points and Practical Steps

While most founder IP assignments follow a standard format, there are areas you may be able to negotiate. Here are some practical tips and examples:

• Exclusions for Prior Work: If you have inventions or projects unrelated to the startup, ask to exclude them from the assignment. List them in a schedule or exhibit to the agreement. For example, if you built a mobile app for a hobby project before founding the company, make sure it is clearly excluded.
• Limitations on Future IP: Some founders negotiate to limit assignment of future inventions to only those directly related to the company's business or developed using company resources. This can be important if you work on multiple projects or consult for other businesses.
• Reasonable Assistance Clauses: If you are required to help the company with patents or legal actions, clarify what is expected and whether you will be compensated for your time, especially if you leave the company. For example, you might agree to assist with patent filings for a reasonable hourly rate after your employment ends.
• Release of Claims: Some agreements include a release of all claims to the IP. Make sure you understand what rights you are giving up and that you are not waiving rights to unrelated inventions.

Checklist Before Signing:

• List all IP you have created for the business, including code, designs, business plans, trademarks, and domain names.
• Identify any prior employers, contracts, or collaborators who may have a claim to the IP.
• Review the assignment agreement for scope, compensation, and ongoing obligations.
• Negotiate any necessary exclusions or clarifications, especially for prior inventions or side projects.
• Consult with a startup attorney if you have any doubts or complex issues.
• Keep a signed copy of the agreement and any schedules or exhibits listing excluded inventions.

Example: John, a co-founder, worked on a project at his previous job that is similar to his startup's product. He reviews his prior employment agreement and discovers his former employer may have a claim. John discloses this to the company and investors, and they work with an attorney to clarify ownership before closing the funding round.

FAQs

Is a founder IP assignment required by law before fundraising?

No federal law requires a founder IP assignment before fundraising, but almost all US investors make it a condition of investment. It is considered standard practice in US startup financing. Some states, like California, have specific rules about what can be assigned, so check local laws as well.

What happens if a founder refuses to sign the IP assignment?

If a founder does not sign, investors may refuse to fund the company, or may require the company to resolve the issue before closing. This can delay or block a financing round. In some cases, it could lead to legal disputes or even the founder's removal from the company. The company may also be unable to enforce its IP rights.

Can I exclude inventions I created before joining the startup?

Yes, you can usually exclude prior inventions or unrelated projects by listing them in the assignment agreement. Be specific about what is excluded, and make sure the company and investors agree. In some states, like California, you may have additional rights to exclude inventions developed on your own time without company resources.

Does a founder IP assignment cover trade secrets?

Yes, most founder IP assignments include trade secrets, as well as patents, copyrights, and trademarks. Make sure the agreement defines IP broadly enough to cover all relevant assets, and that you are not inadvertently assigning unrelated confidential information.

Do I need to file anything with the government after signing?

Generally, no filing is required for the assignment itself. However, if the company later applies for patents or trademarks, it may need to record the assignment with the US Patent and Trademark Office (USPTO) or Copyright Office. This is especially important if the IP will be registered in the company's name.

Key Takeaways

• Founder IP assignments are a standard requirement before US startup fundraising, even though not required by federal law.
• Carefully review the scope, timing, and obligations in any assignment agreement, and watch for state law differences.
• Negotiate exclusions for prior or unrelated inventions if needed, and document them clearly.
• Check for legal risks, including prior employment claims, contractor contributions, and open source code issues.
• Consult an attorney to protect your interests before signing, especially if you have complex IP or state law questions.

If you are a founder preparing for fundraising and need help with IP assignments or related legal documents, contact our team at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they are delivered by licensed lawyers at trusted US law firms through the Sprintlaw platform.