Top 10 Legal Takeaways for Proptech Startups: Detailed Insights from the CRETI Venture Session with Goodwin
In today's fast-evolving proptech landscape, safeguarding intellectual property (IP) and navigating complex legal issues are critical for startup success. During a recent CRETI Venture Session with experts from Goodwin's Strategic Technology and Licensing Practice, founders and entrepreneurs gained valuable insights into essential legal strategies for protecting technology, data, and IP. From pre-formation IP assignment to global considerations and the importance of well-drafted non-disclosure agreements, the session highlighted key steps that can help proptech startups avoid common pitfalls, secure investor confidence, and position themselves for long-term growth.
Pre-Formation IP Assignment: Before a company is officially established, founders and early contributors may develop key intellectual property (IP), including ideas, technologies, or innovations. However, by default, the individual who creates the IP owns it, unless a contract states otherwise. To avoid complications, all IP created before the company’s formation must be formally assigned to the company through agreements like Technology Contribution Agreements or IP Assignment Agreements. This step is critical to prevent any future disputes from founders who may later claim ownership of vital company assets.
Post-Formation IP Ownership: Once the company is formed, any IP created by employees, contractors, or third parties must be transferred to the company. While the work-for-hire doctrine typically ensures that IP created by employees is owned by the employer, the legal default for contractors is different. Companies need to ensure that written agreements are in place with each contributor, containing explicit language like "I hereby assign" to properly transfer ownership of IP to the company. If the correct legal language is missing, it could lead to ownership disputes or delays during financing or acquisitions, as investors will want to confirm that all IP is owned by the company.
Work-for-Hire Doctrine Limitations: The work-for-hire doctrine automatically assigns ownership of IP created by employees within the scope of their employment to the company. However, this doctrine does not apply as broadly to contractors and consultants, making it necessary to have clear contracts in place. The distinction is crucial because without a signed agreement, contractors may retain rights to any IP they develop. This creates a risk that IP crucial to the company's success could be owned by an external party, undermining the company's value or delaying its growth.
Importance of a Patent Strategy: Even if a company decides not to pursue patents, it’s essential to show investors that patent protection was considered and that a deliberate decision was made regarding the IP strategy. Startups with hardware and software solutions are more likely to benefit from patents, which offer legal protection and act as a deterrent to competitors. While software-only companies may find it harder to obtain patents, particularly after the Alice decision, a clear explanation of why trade secret protection is preferable (and how it’s being enforced) can satisfy investor concerns.
Trade Secret Protection: For startups focused on software or innovative processes, protecting trade secrets may be more practical than obtaining patents. Trade secrets include proprietary algorithms, processes, or methodologies that give the company a competitive edge. To maintain trade secret protection, companies must limit access to sensitive information and ensure confidentiality through legal agreements like NDAs. Investors will want to see that proper steps have been taken to protect trade secrets, especially since they cannot be patented or publicly disclosed without losing their protected status.
Non-Disclosure Agreements (NDAs): NDAs are vital in protecting confidential information when sharing it with external parties, such as potential investors, partners, or contractors. A well-drafted NDA should include three main components: (1) an obligation to hold confidential information with reasonable care (important for trade secret protection), (2) a restriction on disclosure to third parties without explicit permission, and (3) a limitation on how the information can be used, typically restricted to evaluating a specific business transaction. Without these protections, critical IP could be exposed, making it harder for a company to claim ownership of trade secrets or defend against misuse.
Trademark and Brand Protection: Beyond patents and trade secrets, protecting a company’s brand identity is essential for long-term success. Trademarks protect names, logos, and other brand elements, ensuring that competitors cannot infringe on a company’s identity. This also includes securing domain names. Startups should have a clear trademark strategy in place to ensure their brand is legally protected, which is an important factor during financing or acquisition. Investors want to see that a startup’s brand is secure and not vulnerable to infringement disputes.
Global IP Considerations: Hiring employees or contractors in different countries introduces additional complexity when it comes to IP ownership. Different jurisdictions have varying requirements for IP assignment. For example, in some countries, employees must regularly reaffirm that they assign their IP to the company. Failing to comply with these local laws could result in disputes or loss of IP rights in those jurisdictions, which can be especially problematic during an acquisition or international expansion. Consulting with local legal counsel is essential to navigate these complexities and ensure compliance with all applicable laws.
Handling IP in M&A and Financing: During mergers, acquisitions, or financing rounds, IP ownership is often one of the most scrutinized areas. Any unresolved issues, such as missing IP assignment agreements or disputes over ownership, can delay or derail a deal. Investors and acquirers want to ensure that a startup owns all the IP necessary to run its business without future claims from founders, contractors, or third parties. Founders must be prepared to present clear documentation showing that all IP assets have been properly assigned and protected.
Non-Compete and Restrictive Covenant Considerations: Non-compete clauses prevent employees or contractors from working with competitors for a specified period. However, non-compete laws vary by state and country, and recent regulatory changes in the U.S., particularly by the FTC, have aimed to limit their enforceability. In some states like California, non-competes are generally unenforceable except in very specific situations, such as the sale of a business. Founders should consult with employment counsel to ensure that any non-compete clauses are legally enforceable and reasonable in scope. Investors may also require that founders and key hires sign non-competes to protect the company’s IP and business interests.
Learn more about Goodwin
To learn more about Goodwin and how to protect your company, please contact Steve Chakoudian at SCharkoudian@goodwinlaw.com or Beth Withers at BWithers@goodwinlaw.com for more information about this session.
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The information provided by CRETI, including in webinars, presentations, and written materials, is for general informational purposes only and does not constitute legal, financial, or business advice. CRETI makes no representations or warranties of any kind, express or implied, regarding the accuracy, completeness, or reliability of any information shared. Participants and readers should seek independent legal or professional advice before making decisions based on the content provided. CRETI assumes no liability for any losses or damages resulting from reliance on the information presented.
