In the Start-Up Entrepreneur Series, I will be taking a deeper look into some of the most common questions early stage founders face in putting together and operating their new businesses.
Every new company has (or hopes to have) assets of some kind. Some are physical. The retailer has his inventory, the service provider her equipment, the tech company its hardware. For others (or for other parts of the same companies) its intangible. Software, information, prototype designs. But while many companies don’t need to worry about the protection of these “proprietary” assets, for others it is an absolute necessity.
Today we’ll take a look at one of the foundational incorporation documents for these IP-based companies: the Proprietary Information and Inventions Assignment Agreement (“PIIA”).
The concepts at play in a PIIA are generally quite straightforward and easy to grasp (as legal documents go). Ease of understanding doesn’t make the agreement any less important, however, and the terms used in such a document can have a significant impact both on the Company as a whole as well as on its founders as individuals. It is highly recommended for each to have a good understanding of the document before signing.
(This is good advice for anything requiring one’s signature in fact, but is of particular importance here.)
The first concept discussed in a traditional PIIA is represented by the first two letters of the acronym: “Proprietary Information”.
Like a non-disclosure or confidentiality agreement that might be entered into between a company and its customers or vendors, the first half of a PIIA generally makes clear that the signatory is going to have access to information that the Company thinks is very valuable, and that, as a result, the signatory has to agree to take certain steps to keep that information out of the hands of the general public (or competitors).
Like in an NDA, parties drafting or reviewing this portion of a PIIA need to pay particular attention to a few areas. How is the “Proprietary Information” defined? Does it include things it shouldn’t? If I’m a founder and I want to work on the road, am I in violation if I take a USB of the Company’s design documents out of the office? What steps does a founder need to take to ensure that the Company’s systems are secure?
Different companies (and different clients) are going to have different appetites for how secure they want (or are required) to keep their information. While every NDA (and PIIA) should state that the obligated party should use nothing less than a “reasonable” amount of care in protecting the information at issue, details can vary quite a bit from there.
What is important is that both sides know what is protected, what is required, and what the exceptions might be.
Related to the concept of protecting the Company’s already existing information is the concept of what should happen to protect information that hasn’t yet come into existence. That is where the second two letters of PIIA come into play: “Inventions Assignment”.
Simply put, the inventions assignment portion of the PIIA “does what it says on the tin“. By executing, the founders of the Company agree to assign any inventions that they make over to the Company. (The traditional PIIA also may include a “work made for hire” provision stating that inventions created or discovered while a founder is providing service to the Company are automatically the Company’s without such assignment. The effect is roughly the same for purposes of this post).
As is the case with the proprietary information protection language, there are a lot of details to consider when drafting or reviewing the inventions assignment portion of a PIIA. What is the meaning of the term “Inventions”? Does it include work a founder does outside the office? If a founder writes the great American novel while employed by the Company does the Company own the rights? And what if the Company needs to prosecute a patent or otherwise engage with state level agencies to protect its property? Is the founder obligated to assist? At his or her own expense or at the Company’s?
While it is important for the Company to have an ownership interest in the assets it purports to use, as you can see from the above there are many, many areas for nuance between “All your base are belong to us” and “Sorry investors, we don’t actually own what we sell”. Finding a good useful middle ground that is as protective of the Company as it can be while not overburdening the individuals that will ultimately grow (or not grow) that same Company, is an important and necessary set-up step for all start-up entrepreneurs.
Other Areas of Concern
While not entirely related to the protection of a company’s intellectual property at the founder stage, a PIIA may nevertheless contain non-competition or non-solicitation provisions restricting the ability of the founders to engage in certain business behaviors both during and after their relationship with the Company.
We’ll discuss agreements designed around such clauses a bit more next week, but for now it’s worth noting that such provisions can be very impactful on the individuals involved with a company, and need to be carefully drafted and reviewed by all parties.
Competing Ownership Interests
In addition to other considerations at play in a PIIA, it is important for the Company (and its counsel) to be aware of any potential conflicting intellectual property rights that might be held by another party.
For tech and other cutting edge companies, it is very common for one or more of the founders to include employees of a research University (with such same University often serving as Company technology licensor). As such founders will have existing contractual obligations to the University (or any other applicable employer), it is important to ensure that the founder in question is executing a PIIA that is protective of the Company but also not violative of the founder’s previous commitments.
This can involve sometimes arduous discussions and/or negotiations with the other employer in question.
There is a lot more to discuss on this topic (and a lot more that good counsel can help provide guidance on), but for the most part the devil will be in the details of the particular document drafted or reviewed. In the meantime, it is worth knowing as a start-up entrepreneur that (i) PIIA’s are an important protective document for companies that derive a significant amount of their value from intellectual property, and (ii) that executing a PIIA can have a significant impact on a founder’s rights.
From either perspective, neither PIIAs nor protection of IP in general should be taken lightly.
As always, if you have any more insights on today’s post or would simply like to discuss further, please leave a comment down below or contact me at firstname.lastname@example.org. I’d love to hear your thoughts.