How Is Intellectual Property Split Between Separating Founders?

Question: What happens if two founders hit a crossroads and they are not able to agree on the strategic direction of the company prior to institutional funding and decide to separate? Is there an easy way to split the company at this point given that there are no hard assets? What rights does each party have to the intellectual property in the company? Is it based on what they contributed or the current equity distribution? If it’s based on the current equity distribution then is it possible to value the intellectual property piece-by-piece?

Our Take: There is no easy answer to your question. Absent an agreement up front about how a divorce affects the IP ownership rights, there is no standard method for determining who owns what. Yes, you both can go out and hire lawyers and they can charge you several hundred dollars per hour to advise you on strategies and arguments of why “you own X and your former partner Y,” but at the end of the day, this will just land you in court and years away from a definitive answer. By the time everything is settled, your opportunity to exploit your IP will most likely have passed.

If you divorce is acrimonious, each of you could claim to own 100% of the IP. Regardless of who actually developed what, or what the ownership of the company is, it’s easy for each of you to say “we both own 100% of the IP,” either severally or jointly.

Bottom line, you have a strong incentive (as does your former partner) to settle this amicably, otherwise, you both are going to be worse off.

Now before the lawyers out there chime in on what could have been done up front (e.g. drafting corporate documents that clearly define who owns what, who has the power to fire whom and take control of the company, etc.) it’s in my experience that few, if any, founders want to rack up legal fees ahead of time to protect against this situation. With 20/20 hindsight, anything is possible, but in reality, I can’t think of any company that has fully thought out this scenario and planned for this contingency when forming the company from the onset.

  • I may be naive about this, but it seems to me that the founders could, at the beginning, agree that the company is only valuable as an entity, and that any split up must result in one person owning the whole thing, including the IP. Then, they could negotiate a buy-sell agreement where either party could make an offer to the other, and the other party would have the option of selling at that price, or buying at that price (maybe plus some premium %).

  • ELS

    In 99 cases of 100 the unimplemented IP of a startup is pretty much worthless.
    It’s the old “ideas are overvalued” meme.
    Is the default that everyone has equal rights to everything?

  • Jason

    The default paradigm depends on both federal and state laws, but generally everyone has “some” rights to everything. It’s never clear and always messy, that is why you either need to figure this all out beforehand, or be willing to compromise afterwards.

  • As Jason points out, there are a lot of variables involved and plenty of good reasons to address this sooner rather than later.

  • Hmm, my preview had the link, but it was stripped when it actually posted.

  • Michael Stack

    Ideally, all the IP that’s been created by/for/on behalf of a startup is owned by the company itself, by virtue of either assignment or contribution agreements or work for hire doctrine. So (ideally) none of the individuals have any rights in the IP. If they want it, they need to negotiate it out of the company.
    I agree, though that the bottom line is that the IP’s probably not worth much and it’s certainly not worth the time and cost of a pre-nup among founders of how you divide up the remains.
    If you’re a founder and really really want to be able to get your IP back if the startup doesn’t get funded, then license it to the company up to the point of funding (at which point the investors will rightly insist it be assigned into the company).