IP is usually the most valuable asset a startup owns. But ownership of IP isn’t always as clear as entrepreneurs would prefer.
Here’s a hypothetical situation:
 
A + B start a company named ABCo. They have a great idea for a product, but no cash. So they agree to take stock in  ABCo. instead of salary. Then they hire C, a developer, to help build their product. They pay C with stock, too.
One day, A realizes she’s not getting as much equity as B and C, even though she wrote most of the original code for ABCo. So, the night before a meeting with an investor, A deletes all the code she wrote from ABCo.’s platform. She claims that she, not ABCo., owns the copyright to that code. Everybody lawyers up and litigation ensues.
 
Who owns the code in question? In this post, we’ll take a closer look at some of the factors that a court would use to decide that question.

 
First, two disclaimers: 
  1. Copyright, patent, and trade secret law can all apply to software code, but for this post, we’re only going to consider copyright.
  2. The differences between “employees” and “contractors” are incredibly important, but not the topic of this post. For a nice overview, check out this post.
 
With that out of the way, let’s take a look at the default rules: absent a written agreement, this is who would own the code.
 
If A is an Employee of ABCo.
 
The default assumption is code written by an employee belongs to the employer. This is because of something called “work for hire doctrine.” Under this doctrine, work created by an employee in the scope of her employment belongs to the employer. So, if A is an employee, and she wrote the code as part of her employment, she has no proprietary right to the code. For the purposes of copyright registration and enforcement, ABCo. is the author of the code.
 
If A is an Independent Contractor of ABCo.
 
The default assumption for contractors is the opposite: if A was a contractor of ABCo., then she owns the code, unless there is a written agreement that says otherwise. Among numerous other reasons, this is why having actual contracts with early members of the startup team is crucial. Code written by contractors can be considered work for hire if the proper language is used in their contracting agreement.
 
If A is a Founder of ABCo.
 
So what if A is a founder of the company? She started the ABCo., after all, and most new ventures don’t take the time to get written agreements in place–especially when the only members of the company are the founders.
Unfortunately, “founder” isn’t a separate category recognized under copyright law. IP rights to code written by a company’s founders will depend on whether they are employees or contractors. Founders often have full-time jobs and work on their company in their spare time. They are also usually the first employees of the company. They rarely have written contracts. The situation can get murky, fast.
 
So, who own’s the code from our hypothetical? It may depend on another factor: where the case is being tried.
 
ABCo. is based on a real company and a real case: JustMed, Inc. v. Byce. In that case, which originated in Idaho, the 9th Circuit ruled that Byce (“A” in our scenario) was an employee. The Court looked at the informal nature of the startups (compared to established businesses) when making this decision.
 
But a similar case from Wisconsin went the other way. The Court in Woods v. Resnick decided that a founder of a company was a contractor, and personally owned the code he wrote.
 
The bottom line is that the default rules aren’t clear enough to protect your company. Written agreements go a long way towards establishing clear ownership of a company’s IP, and they are comforting to investors who aren’t interested in buying in to a Federal lawsuit waiting to happen. Take steps to secure ownership of key IP with written agreements as soon as possible.