An investor deal for an IT startup is, in most cases, a desirable event. The company gets expertise, money, and professional support. But there are also disadvantages.
With insufficient understanding of the legal side of the issue, startup participants—that is, developers—may be left with nothing: Without having copyright, an unscrupulous investor might appropriate all rights to their products.
It’s worth remembering that software copyright arises at the very beginning, as soon as you’ve created an architecture, sketched an interface, or created a piece of code.
In this post we’ll look at the legal aspects of intellectual property rights. This way, you can be better informed about your intellectual rights as a developer and avoid possible pitfalls.
The main condition of the business idea is to find an investor to finance the startup. When that wonderful moment comes, the financial terms of the deal are agreed, and the only thing left is to sign the documents.
At this point—and it’s good if it happens at this early stage—you might think: “Today, my development is just an idea, but tomorrow it can become a successful business with multimillion-dollar income. How can I protect my brainchild, and what should I look for in a deal with an investor whose lawyers have done a great job of coming up with a lot of confusing conditions?”
Let’s start with the fact that the authorship of the produced product belongs to the software developer. This is the inalienable and intangible right of the author. The developer may require that their name be indicated on a copy of a program, game, or any other work created.
At the same time, the developer has the option not to enforce this in exchange for more interesting financial proposals—for example, higher royalties. Of course, then no one will personally know about the developer, but perhaps this is not required. Putting a name on it is more about developing a personal brand than protecting technology.
But what about the protection of the exclusive right to technology? It is originally owned by the developer. Then, in most cases, it is transferred to a startup (created legal entity) where the developer is a participant.
During the conclusion of the contract, the investor wants to be sure that the founder will not disappear with a successfully developed business, so the deal may include conditions for the transfer of the right to develop. Therefore, it is necessary to focus on the scope of exclusive rights transferred to the investor as well as the following circumstances.
Evidence of Rights
Before entering into agreements with an investor, you should think about how to confirm your development rights. Proofs may be required by the investor to verify your true ownership of the software, and you may also need them in case of a dispute with the investor.
To protect yourself from losing the right to the developed software, you should first ask yourself whether you have any supporting documents.
In countries such as the USA, Japan, and Russia and the EU countries, the software is copyrighted upon its creation. To do this, you must confirm the fact, the date of development, and the ownership of the right to yourself. Notarized documents on the storage of the program on electronic media are also evidence of copyright ownership.
The date the program was created can be confirmed by the data of the Internet Archive WayBackMachine or by Google cached pages. To confirm that the program belongs to your company, you must provide the contract that you entered into when you were hired by the company. This can be:
- Agreement on alienation of exclusive rights (transfer of copyright in full to the person who acquires these rights)
- Employment contract (rights between employer and employee)
- Author’s order agreement (the development is transferred to the customer in ownership, unless the agreement of the parties provides for its transfer to the customer for temporary use)
Do not forget that all contracts must have transfer documents. The Transfer document is the basis for the recognition of expenses and the statement of deductions for the transaction. The form meets all the requirements of accounting and tax accounting, so it is safe to use it in your work.
An indirect confirmation of the software copyright can also be financial statements in which the program will be listed as an intangible asset on the balance sheet. This is important, since the main risk factors are the company and the personality of the investor—is this person doing business in good faith; are they a newcomer to investing in IT or a professional player in the market? It is extremely important to protect yourself. Do not hesitate to use different options to protect your product.
A development can also be protected by registration, which is a more reliable way of proving ownership of rights. The registration procedure depends on the country in which you are located. If you plan to enter the international market, then you need to request international registration in the countries where you plan to do business.
Additional Means of Protection
There are other means of providing proof of ownership of the design and copy protection. For example, you can include in the program code text indicating your affiliation and adding the designation © (it is imperative to carry out state registration of intellectual property).
You can also make your code recognizable by including intentional errors that do not affect performance. It is not a legal protection in the classical sense, and it is not mandatory for execution, but it can be evidence in the case of bad faith behavior of one of the parties.
If your development includes a database, you might want to add a unique, off-the-shelf item that has no functionality but can be tracked. For example, a nonexistent email address. This will confirm that the copy of the database has been completed. For example, such measures will help when signing an agreement with an investor, where one of the points is not to transfer the source code of the developed program. If this clause of the agreement is violated, it will not be difficult to trace it.
Think Long Term
Think long term and protect your work the right way. When making an investment in order to protect intellectual property, it is necessary to work out a wide range of legal issues, analyze the procedure for concluding the arrangement, and view the content and consequences of the transaction from all sides.
The two key things to remember are, firstly, to obtain the rights to develop in accordance with international standards to attract investment; and secondly, to protect rights before demonstrating the development to an investor.
Copyright and legal aspects might feel complicated (or even boring), but they are an important element in the business aspects of developing. By learning how to keep the rights to your program, you protect your hard work and all its future possibilities.