Among the legal issues that startup founders most frequently overlook is one that can be fatal to a financing or acquisition: the question of who actually owns the intellectual property that the company is built on. It seems obvious that the company owns its technology, its code, its brand, and its content. In reality, without proper written agreements, that assumption may be wrong in ways that are expensive and sometimes impossible to fix.

The Default Rules of IP Ownership

Intellectual property law in the United States does not automatically vest ownership of creative or inventive work in the company that benefits from it. The default rules turn on the relationship between the creator and the company. For employees, copyright in works created within the scope of employment belongs to the employer under the work-made-for-hire doctrine. For purposes of patent law, however, inventions belong to the inventor personally, and the employer acquires rights only through a written assignment. For independent contractors, both copyright and patent rights default to the contractor, not the company, unless there is a written agreement assigning those rights. These default rules create significant gaps that IP assignment agreements are designed to close.

Consider the most common early-stage scenario: a technical founder begins building the company’s core technology before the company is formally incorporated. During this period, there is no employer-employee relationship with the company because the company does not yet exist. The technology the founder creates may belong to the founder individually rather than to the company, even after the company is formed, unless there is a written assignment. This is one of the most common IP ownership problems that surfaces during venture capital due diligence and, if not addressed, can block or significantly delay a financing.

What Does an IP Assignment Agreement Cover?

An IP assignment agreement is a written contract in which an individual assigns to the company all intellectual property rights in work that the individual has created or will create in connection with the company’s business. The agreement typically covers copyrights, patents and patent applications, trade secrets, trademarks, inventions, discoveries, improvements, and any other proprietary work product, whether or not patentable or otherwise protectable.

Critically, IP assignment agreements should cover both past and future work. The past work assignment addresses IP that was created before the company was incorporated or before the employment or service relationship began. The future work assignment addresses IP that the founder, employee, or contractor will create in the course of their work for the company going forward. Both components are necessary: a future assignment without a past assignment leaves a gap for pre-incorporation work, and a past assignment without a future assignment leaves gaps for work created after the agreement is signed.

Founder IP Assignments at Incorporation

When a startup is incorporated, founders should enter into restricted stock purchase agreements — which include IP assignment provisions — as part of the founding documents. The IP assignment in the founders’ agreement or restricted stock purchase agreement should require each founder to assign to the company all IP related to the company’s business, including work created before incorporation. If a founder has been developing technology, code, designs, or other work product that will be included in the company’s products, that work should be explicitly identified and assigned as part of the founding transaction.

Investors conducting due diligence will review whether founders’ IP has been properly assigned. If a founder created significant technology before incorporation and there is no written assignment, the investor will require this to be cleaned up before the financing closes. Cleaning it up after the fact is possible but complicated: it may have tax implications, particularly if the IP has appreciated in value since it was created, and it requires the founder to make representations about the chain of ownership that may be difficult to fully substantiate years after the work was done.

Employee IP Assignment Provisions

Every employment agreement for startup employees should include an IP assignment provision that requires the employee to assign to the company all work product created in the course of employment that relates to the company’s business. This provision complements the work-made-for-hire doctrine by addressing patent rights — which do not automatically belong to the employer under work-for-hire — and by covering ambiguous situations where work was created partially outside of working hours or using some personal resources.

The IP assignment in employment agreements should also require employees to disclose to the company any inventions they create that may relate to the company’s business, even if the employee believes the invention is outside the scope of the assignment. This disclosure obligation helps the company identify potential IP issues before they become disputes and ensures that the company has the opportunity to evaluate whether an invention falls within the scope of the assignment before the employee does anything with it.

State Law Limitations on Employee IP Assignment

Several states — including California, Delaware, Illinois, Minnesota, North Carolina, and Washington — have enacted laws that limit the scope of IP assignments in employment agreements. These laws protect employees from being required to assign inventions that they developed entirely on their own time, without using the company’s equipment, supplies, facilities, or trade secret information, and that do not relate to the company’s business or anticipated business.

California’s version of this protection, codified in Labor Code Section 2870, is particularly significant given how many startups are headquartered there. Employment agreements in California must explicitly notify employees of the Section 2870 limitation, and IP assignment provisions that violate it are unenforceable. Companies should ensure that their IP assignment provisions comply with the law of each state where they have employees, and should include the required notice language in states where it is mandated.

Contractor IP Assignments: The Independent Contractor Problem

Independent contractors present a particular IP ownership risk that many startup founders underestimate. When a startup hires a freelancer to build a website, design a logo, write code, or create any other work product, the default rule under copyright law is that the contractor owns the copyright in the work they created, not the company. The work-made-for-hire doctrine that automatically vests copyright in employers does not apply to independent contractors, except in nine specific categories of works where both parties have agreed in writing that the work will be considered a work made for hire.

The practical solution is straightforward: every contract with an independent contractor who will be creating work product for the company should include a written IP assignment. The assignment should cover all work product created for the company, should be as specific as possible about the types of work that fall within its scope, and should include a power of attorney authorizing the company to execute any additional assignment documents that may be required to perfect the transfer of ownership in specific jurisdictions or for specific types of IP.

The Due Diligence Moment of Truth

The importance of complete IP assignment documentation is most acute when a startup is raising venture capital or going through an acquisition. In both transactions, the buyer or investor will conduct legal due diligence that includes a review of all employment agreements, contractor agreements, and founder agreements to verify that all relevant IP is properly assigned to the company. Gaps in the IP assignment chain are among the most common issues identified in due diligence, and they can range from minor — a contractor worked briefly on an early prototype without an assignment, but the work was not incorporated into any current product — to deal-threatening — a key founder developed the core technology before incorporation without ever executing an assignment.

Getting IP assignments right from the beginning is far easier than cleaning them up later. The documents are straightforward, the cost of preparing them is modest, and the protection they provide is fundamental. For any startup whose business depends on proprietary technology, code, designs, content, or other intellectual property, an IP assignment program — covering founders, employees, and contractors — is not a nice-to-have. It is the foundation of the company’s legal ownership of its most valuable assets.