legal, intellectual-property, partnershipI have created an innovative software system and a CEO of a small but international software company wants to go into business with me. He is a friend from University so I’ve know him for years and he is very trustworthy. He is very successful and has the experience and credentials of building a software product from scratch.
We agreed 60/40% and that I would always keep 51% if we have to dilute both our share to give shares to other people. His software company are offering an 18 month contract to start paying me (my company) $6000 per month to start developing it. He will also provide support staff when supporting customers becomes an issue, developers to help out with any front-end stuff and also has a sales people to grow the business.
I have written the technology by myself and my business partner came up with the product idea to develop a cloud software product on top of my technology. So we both have contributions to the IP: I contributed all the technology but he has contributed the product idea that uses my technology.
Should the IP be in my name?
He has suggested that the IP belongs to the company rather than just me so he has some ownership of the IP rights. His concerns is if it’s in my name then I could pull the plug and he would be left with nothing, a dent in his pockets and ; where as if it’s the company name then we can buy the other out or if we get bought out by the likes of Amazon/Google then it’s split 60/40%.
A friend, who’s training to be a lawyer, is strongly insisting that it should be in my name and that I am being naive. However, I personally feel it’s a great opportunity for both of us and I cannot foresee any issues in it being in the company’s name but I am not an experienced business individual.
There’s no right answer.
Your lawyer friend has it right on paper.
In practice, your business relationship with your friend will be much better if you follow what your heart is evidently telling you to do, namely share ownership of the IP.
Perhaps you could ask your lawyer friend to create some kind of IP agreement whereby the IP remains yours but the corporation is entitled to the IP under the MIT license, or something to that order? That would keep things square on your end when it comes to IP, and it would protect your partner in the event of a split – he’d basically keep the right to the source code and IP up to the point where you split, and do with it as he sees fit from that point forward.
Related reading: the recent Hoefler and Frere-Jones split.
That depends.
One thing that comes to mind from a legal perspective is what happens if you company goes bankrupt. Now, I’m not a lawyer, but I know how this works in my country (Netherlands). Below is a description of that:
Basically if your company (let’s call that ‘MyCompany’) goes bankrupt and you have a ‘limited’, all assets of the company are no longer the property of MyCompany. This includes the intellectual property, in this case: source code. It’s then sold to pay off debts - or - if you have an escrow in place, it’s distributed according to the agreements.
Now, if it’s a limited, the chain of responsibility usually ends there. If not, the chain goes up and some other legal entity gets the blame (… and to pay).
I’m assuming here that there ain’t a case of mismanagement or other legal reason; if there is, you get to pay in all cases. Possible bankrupt cases where it isn’t your fault include f.ex.: monthly cost (staff) that you are unable to pay due to customers that run away, a legal claim from a customer or employee that you cannot affort, etc.
While it doesn’t solve the assets in MyCompany, you can protect your source code and IP by putting it in another limited. Let’s call this new legal entity ‘Hank’. The purpose of ‘Hank’ is to hold and license the intellectual property of MyCompany (and you can use it to put money you don’t really need immediately). You can distribute shares 60/40 with your friend or whatever you feel appropriate.
Now, if MyCompany goes bankrupt, Hank will still not be bankrupt and Hank can start MyCompany2 with new shares. Hank will still have all the source code, you can hire your employees back in MyCompany2, etc. Also, Hank will license the IP back to MyCompany, thereby generating money (ask your favorite tax expert for the details). MyCompany periodically sells off all source code to Hank, thereby safeguarding it.
Note that this just is a ‘better alternative’, nothing more. The construction also allows you to create a ‘shared place’ with your business parter, where you can put the assets that belong to the both of you, using shares as ‘ratio’. This construction will cost you money (tax) and when you go bankrupt, you will probably loose a significant amount of money + work from MyCompany, all staff, your marketing efforts are back to square one and your customers are gone. In short, it ensures that you don’t have to start re-building your MyCompany2 from square one, but it’s definitely not a free ‘out-of-jail’ ticket.
As always: ask a (good) lawyer and a tax expert for the details.
All content is licensed under CC BY-SA 3.0.