Founders often create intellectual property prior to forming their company. A common but easy to avoid mistake in early stage companies is the failure to properly assign such IP to the company. It is important that at the time of company formation, all IP critical to the company’s value proposition be properly assigned to the company. This is accomplished by having the founders and other individuals who may have contributed to its creation execute IP assignment documents in favor of the company.
Failure to assign critical IP to the company can give the individual(s) holding rights in such unassigned IP significant leverage over the company when the company goes to seek venture capital or realize a liquidity event. Such an individual could also use such unassigned IP for his or her own competitive purposes, thereby eliminating what the founders had likely intended as the company’s exclusive rights to such IP. For these reasons, potential investors and acquirers will typically confirm in their due diligence that the company has rights, whether by ownership or license, to all IP critical to the company’s business. As a result, the failure to properly assign critical IP at the time of formation can materially impair the company’s value and the founders’ ability to recognize such value in an equity financing or through a liquidity event such as a company sale or public offering.