Your Company’s IP is Critical to Disrupting Your Target Industry
You’re an entrepreneur with a big idea and you’re poised to disrupt your target industry. Your company’s IP is critical to making this disruption happen. To get your operations up and running, you enlist the help of outside business consultants, technical people and creatives. Momentum and excitement are building fast.
But what is one thing that could bring this juggernaut to a screeching halt? A proprietary information and inventions assignment agreement (PIA) that is missing in action.
What is a PIA?
A solid PIA is an essential startup tool that protects your company’s intellectual property (IP) for two reasons:
- As the name implies, a PIA protects a company’s proprietary information by imposing written confidentiality and non-use obligations on company employees and consultants.
- PIAs include an inventions assignment component, which ensures that any inventions, modifications and improvements created by employees and consultants on the job are properly assigned to and owned by the company.
This is straightforward stuff. Unfortunately, many entrepreneurs make the mistake of assuming that their IP and confidential information are protected without a PIA.
“But wait,” you say. “I have Non-Disclosure Agreements (NDA) in place. Aren’t my business interests secure?”
No, and here is why:
An NDA is designed to keep your company’s “secret sauce” confidential while it is being evaluated for a particular purpose, and it’s usually a precursor to a more comprehensive agreement going forward.
- how the company’s IP, information and assets can be evaluated (use restrictions);
- who can access them (non-disclosure restrictions); and
- for how long.
For these reasons, NDAs can be a critical first step when sharing sensitive information with third parties. But typical NDAs are not designed to govern your company’s ongoing relationships with employees and consultants involved in the creation and development of your company’s IP.
In fact, a typical NDA expressly prohibits the receiving party from developing, improving, expanding or using (except to evaluate) the IP, information and assets that it receives under the NDA. This type of agreement would not suit an engineer or technical consultant who is tasked with creating and developing IP on behalf of the company.
You Can’t Be Too Careful
As we have seen over the years, hard-charging, well-intentioned entrepreneurs can be prone to overlooking important details and unknowingly exposing their companies to significant risk by not properly documenting their relationships with employees and consultants. These mistakes occur when entrepreneurs focus solely on building products or scaling, or when they place their complete faith in people and relationships and operate on the honor system.
We don’t want you to make the same mistake. You should insist that your employees and consultants execute a PIA right from the start, before your new hires get to work. Otherwise, you may damage your company’s prospects. Perhaps even derail them. Here is an example:
Timing is Everything
Several years ago, our firm was company counsel to a local software company. It was due to be acquired by a large Japanese technology company with a multibillion-dollar subsidiary in San Jose, California. Our client was optimistic the deal would close quickly, until an issue surfaced during the buyer’s due diligence.
The issue was: Several years prior, the software company had hired a citizen of Vietnam (who still resided there) to work on the company’s core software code. The relationship hadn’t been documented. (You can guess where this is going…)
The Japanese company issued an ultimatum: Get this individual to sign a PIA – assigning all ownership of the code to the software company, or no deal. What followed was a lengthy manhunt in Vietnam to locate this person and get him to sign the PIA.
Here is another example. We worked with a buyer seeking to acquire a Los Angeles based startup. This company had developed proprietary software that could significantly improve the quality of low resolution 2D movies to HD or even 3D.
When we asked about PIAs, the startup quickly and confidently responded that it required all employees to sign NDAs as a condition of their employment. The owners got a rude awakening when they learned they should have instead required employees and consultants to sign PIAs. Now, they would have to ask approximately 25 people to sign PIAs as a condition of the transaction.
Even worse, most of these people were unaware that the company was in talks to be acquired. This put the company in the unfortunate position of having to secure signatures on the eve of a major transaction that might not be welcome from the employees’ perspective.
The Moral of These Stories Is Clear
Protect your company’s IP with PIAs! You need to have all employees and consultants sign PIAs when they join your team. No, you probably aren’t saving yourself a trek through Southeast Asia with a pen and PIA in hand. But you may very well find that, when these relationships go south (as some inevitably do), you’ll be glad your company is covered.
Think about it this way. If your employee is never asked to sign or refuses to sign a PIA at the onset of your working relationship, what are the chances he or she will comply in the future? Over time, and with valuable work product in hand, your employee will have a lot more leverage, and little incentive to cooperate.
How have PIAs helped your business succeed? Or, better yet, prevent catastrophe? Please share your story or your thoughts about this post. The conversation you start below could change another company’s future.
To Your Great Business,