Founder Exits: What are the IP implications when leaving the software company you founded?
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It’s not uncommon for company founders – and those in other positions who’ve created intellectual property for the business – to want to take IP with them when they want to exit a company. Moving on is often a straight-forward matter, but if you also want to pack up the IP and take it with you, it’s rarely simple and may have significant legal and business ramifications.
What are the issues that you’ll likely face? Where are the risks?
We have experience advising on these and other similar IP issues and thought it might be helpful to lay out a recent use case for a specific (un-named) client for which we were able to secure a very favorable outcome. We hope it’s helpful for anyone finding themselves in the same position.
Our client was one of the founders of a software company and also led the software team within the company. He developed software that helped to build the company, but at some point the other founders lost faith in the its effectiveness. Our client disagreed with his co-founder’s evaluation and believed in the software. This disagreement led to a falling out between our client and the other founders. Our client came to us for strategic advice on how to exit the company safely and avoid legal issues.
Back to our client story in a moment, but here are a few things to consider as you prepare to exit a company with IP intact:
Determine ownership: It may be defined in employment contracts, IP assignment agreements, or founding documents.
Check for IP creation documents: Were records of the IP’s development process kept? Look for dates, creators, and contributions.
Licensing agreements: Was the IP licensed from a third party? What are the terms and conditions of the agreement?
Work-for-hire: If you were employed by the company when you created the IP or otherwise signed an independent contractor agreement, the work performed for the company might be considered work for hire (i.e., the company owns it).
Non-compete agreements: are there any non-compete clauses in your contract that may make it impossible for you to use the IP?
Next up: Negotiations
Companies are often willing to negotiate with those exiting the company if they see some benefit, want to avoid legal disputes, and maintain their reputation in the industry.
Such was the case with our client’s former company. We negotiated an exit for him that involved a monetary payout and allowed him to take sole ownership of the software. For the company’s part, they received a limited license-back agreement for the software should they need it, as well as a non-compete agreement with our client in the company’s industry. Meanwhile, our client took a slightly reduced buy-out (but still an amount he considered fair), but got the opportunity to do with the software as he wished, as long as it didn’t compete in the same industry as the company.
We will discuss the final chapter of our client’s story in a moment, but here are a couple of things to consider if you’re able to exit with your IP intact. And note: these are ideas that you should consider, even before you begin your actual exit. In other words, have a plan:
Spin-off a new company: Short of competing in the same arena as the company you exited, you may want to create a new company to exploit the IP in a way the previous company couldn’t or wouldn’t. Consider bringing in investors who believe in the IP to the same extent that you do.
License the IP: You can retain ownership of the IP but license its use to other companies.
There are other options as well, depending on your software and circumstances, but the second option is the one our client chose. With our help, he was able to license it to multiple other industries for sizable payouts and was very pleased with the outcome.
Takeaway:
If you’re considering an exit from a company you founded, or similar situation, and would like to take the IP you created with you, be prepared to face potential legal challenges from the company, its investors, or other stakeholders. They may see your move as a disruption to their business that will cause harm to the company’s revenue and value. Be aware that you may be making a high-stakes decision with consequences for both you and the company. In these cases, getting professional legal help to navigate these complexities and protect your interests is a good idea.