Michael Hool, a startup legal advisor, warns that investors won't fund companies without clear IP ownership. Contractors and founders must sign invention-assignment agreements so the company owns the code. He describes a cosmetics case where intent-to-use trademark filings forced a competitor to abandon a product line and pay $1 million.
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Certain industries, software, I get this all the time where you'll have consultants working on your code, writing code, and they'll do different parts of it. Then they go do something else and you're growing the company. You go to bring on an investor and the investor is doing due diligence and they're checking on the ownership of the IP. They ask you one question, did you have everybody that worked on this software sign an assignment? And if the answer is no, then it's one of those hiccups that's going to slow things down, could end up being the death of the deal. If someone is not an employee, a consultant, the presumption is they own what they've created when they're working, when they're creating it for you. So you need to create a contract that says No, you don't own it. I own it. And not only are we saying that, but you're signing an assignment that says anything I've created, I hereby assign to the company. That's really important. And it's important for founders too. You don't overlook founders that are going to be working on creating ideas that you'll be filing patents around and things like that. You want, you want as a matter of course everybody to sign a standard. There's different ways to— or different documents that it's called. Proprietary rights agreements, invention assignment agreements. Excuse me. Whatever. But the point is it has to have that language in it saying the company owns everything. If they don't— and I've had this happen where, you know, you can't even track people down that helped create the IP. And so it's a big hole in the ownership. If the deal is incredible enough and the risk is relatively low, you can still bring in the money. But if it's dependent on this IP, then chances are you're not going to get the money if you can't prove that you own it. So that's really important. On the key brands, not a lot of companies have this issue, but I've had— I'll give you one example of how important this can be. I had a client in the cosmetics space that the creative person on the team would basically think up brand names on the weekend and call me up and we'd file 10 trademark applications on Monday. They were all intent-to-use applications, meaning they weren't even using it. It was just, let's get this in line in case we might want to use it. The other partner would be like, why are we spending all this money on that stuff? It's always difficult to balance. That's why I say when you want to— if some of those ideas ripen into we're going to go with it, we're going to invest money and create this brand and sell, then you want to invest and make sure the name is tied up, that you have it, the trademark. In this particular case, this client had a really catchy name for a product. It was very simple. And lo and behold, one of the massive companies that was causing us stress, trying to keep us from getting into the marketplace, turns out they had designed an entire line that they were rolling out. And they had spent millions of dollars with all of their materials. And they never checked to protect the brand. We were out there and we had it. And it's all we had was a piece of paper saying we filed an intent to use. We're not even using it yet. But we're going to trump you because once we start using it, our date relates all the way back. Make a long story short, we got them up to $1 million for that. And my client actually turned them down because my client had— was well-funded. And it was just a way to kind of give a jab back at this big company that was pounding us in the marketplace. But they had to trash all the stuff that they did and rename their product. So it's just a mistake that you don't want to make. If you're going to be investing in something, collateral materials, definitely protect that. And don't go crazy and protect everything you possibly could think of because most of that stuff you never use. But you just have to think it through and when— that's why I use the standard of when you're going to invest big money into something, you definitely want to file to protect it. Thank you.
