The Transaction Lawyer

Not very long ago, I met with a young company that is trying to identify potential strategic partners and map out market strategies now that they have started selling their product and signed up a few initial customers.  They have a great story so far – a working product, sincere interest and some revenue from high profile customers (with promise of more to come) and validation that they are on to something.  As we continued our discussion, I asked them about their history and the path that had brought them to where they are.  I soon learned that they share a characteristic that is common among many bootstrapped companies – they had failed to properly secure the intellectual property upon which their company is based.

I learned that in their quest to get their company off the ground quickly, they bypassed a few key protective elements that could ultimately derail their enterprise.  For example,

• The product idea was derived from a “discarded” product concept that the founder had raised at his previous employer.  (To add a twist, the founder had changed roles from an employee to a consultant at some point during the process.)  The employer was supposedly supportive of the new company running with the product, but there was no formal arrangement with the employer.
• The founders had come together through a mutual acquaintance and seemed to work well together, however, they had no formal agreement between themselves, and it was not clear what technology belonged to the company and what technology belonged to the founder who brought it in.
• They had used contractors to help them develop their software and designs.  They had formal agreements with some contractors, but in those cases they used the contractor’s agreement forms or a form they found on the internet without really reading it, and definitely without legal review.
• Their initial customers helped them with refining some components of their product and in some cases, the company developed add-on features that were requested by their key customer.

This type of fact pattern is not uncommon.  Cash-strapped business owners do the best that they can with the few resources they have to work with, and often knowingly (or unknowingly) assume some fundamental risks until they get far enough along to circle back.  Unfortunately, any of the scenarios described above could result in a tragic implosion in the future if not properly addressed.

A company in this situation needs to focus on nailing down the ownership of its intellectual property and to make sure to get its corporate house in order.  Agreements with the former employer, the contractors and the customers, and agreements between the founders, can more easily be addressed as this early stage.  If an issue or objection arises now, it is more likely that it could be resolved now – before the company becomes successful or before the eve of a critical financing or acquisition.  Few things kill an important deal faster than a surprising cloud around the ownership of critical intellectual property.