When you bring in a co-founder, you also need to foresee the potential risks, which may arise when the co-founder would exit. An exiting co-founder may pose a risk to your existing intellectual property. He may claim the intellectual property as his own and may start selling the same product under another brand. Typically, when two or more founders get together to start a company, they discuss and come up with various ideas. Hence, a co-founder is privy to proprietary information from the very beginning and his exit may cause a significant risk in terms of loss of intellectual property.
This brings us to the question: How to protect your intellectual property from an exiting co-founder? The answer lies in strategic and contractual protection. Let us see the different ways in which the risk of loss of intellectual property can be mitigated when a co-founder leaves.
Intellectual Property Ownership
Having your ideas protected by intellectual property rights enhances the value of the company and also attracts potential investors. Hence, it becomes pertinent that intellectual property is protected against both present and future risks. Who owns the Intellectual Property, becomes a material question in this regard. Intellectual Property should always be owned by the company. There are two ways of doing this: either you obtain the intellectual property in the name of the company or you put in a clause in your co-founders’ agreement that if a co-founder leaves, he will have to mandatorily assign all intellectual property obtained in his name for the purposes of the company to the company. When co-founders start a company, they often end up obtaining intellectual property in their own name, because the future of the company remains uncertain. Thus, obtaining intellectual property in the name of the company may not seem a very viable option for early-stage start-ups. Hence, having a mandatory assignment clause would help prevent a co-founder to leave with the intellectual property.
Assignment of Intellectual Property in Employment Agreement
A co-founder may also be associated with the company in the capacity of an employee. For instance, many times technical persons who develop the intellectual property are also assimilated as co-founders. If the co-founder is signing a separate employment agreement for the same, make sure that the clause pertaining to assignment of intellectual property is included here as well. The clause should mandate that any intellectual property which the co-founder develops while being a part of the company would be assigned to the company and the company would be the owner of the same.
Having a proper Non-Disclosure Agreement (NDA) in place is an imperative to bringing a co-founder on board. An NDA would protect all the confidential information of the company such as trade secrets, proprietary information, confidential documentation etc. Make sure that the NDA is applicable to the co-founder even after he leaves the company.
Apart from having an effective NDA in place, you should have a confidentiality clause in your co-founders’ agreement. Such a clause would give an added protection to all your confidential information. A co-founder may be engaged in various discussions regarding development of an intellectual property. He may be privy to written code documentation or the development of the brand logo at its nascent stage. Hence, it is important to protect not only written but also oral information which a co-founder may have access to. Hence, define the term confidential information as widely as possible. The employment agreement of a co-founder (if any) should also contain a confidentiality clause, which would prohibit the co-founder from disclosing any sensitive information such as the process by which he developed a certain product to anyone outside the company. A confidentiality clause should survive the termination of the co-founder and employment agreements.
A non-compete clause is often included in a co-founders’ agreement to prevent the co-founders from working for a competitor. While the right to livelihood of any person cannot be taken away by a contractual clause, every company has the right to protect its proprietary information. Hence, if the co-founder by the virtue of his designation is privy to confidential proprietary information, a non-compete clause may help you in preventing the disclosure of such information to your rivals or competing entities. However, its enforceability has always been on a slippery slope and hence, it should be coupled with other protections such as confidentiality clauses, NDA etc.
A non-solicitation clause, may not directly protect intellectual property. But, by preventing the co-founder from inducing the employees from breaking their employment contract with the company, it indirectly protects the same. For instance, if an employee has developed an app for a company, he knows the process. If the co-founder entices this employee with a higher pay package or any other advantage and induces him to break his employment contract with the company, this may pose a risk to the company. Hence, having a strong non-solicitation clause in a co-founders’ agreement and his employment agreement is also important.
To conclude, contractual protections such as those mentioned above are required to protect the intellectual property of a start-up against a leaving co-founder. Many founders do not understand these legal intricacies and commit errors which may risk the loss of their intellectual property. You should preferably get your co-founders’ agreement and employment agreements drafted by a legal professional. If you require any help drafting an NDA, a co-founders’ agreement or an employment agreement, LexStart is there to assist you. You can write to us at support@Lexstart.com and our highly qualified team of lawyers would guide you and help you out at each step.