Who Really Owns the Source Code in a Tech Startup
Source Code can be one of the most valuable assets for new tech startups – sometimes, the source code is the only asset. Understanding who owns the source code is critical for founders, developers and investors.
Informal setup can mean problems for determining who owns the source code
Technology (and other) startup businesses often operate on a very informal basis sometimes with not much more than a handshake agreement between founding partners. Unfortunately, things don’t always go as planned. When things start to go wrong, that’s when the written agreement governing your business will protect you. The problem is, many businesses simply don’t have the proper documentation to protect their business and assets.
Source Code dispute leads to expensive litigation for tech startups
A case involving healthtech in the 9th Circuit illustrates what happens when startups don’t create operating agreements – JustMed, Inc. v. Byce 600 F.3d 1118(9th Cir. 2010). JustMed, was a small company based in Oregon was creating software and hardware for medical devices founded by a pair of former brothers-in-law. One of the brothers of the startup ended up creating much of the source code from his home in Idaho. Because there was no formal written agreement related to the ownership of the source code between the company and its founders and no formal employment agreement, an easily avoidable dispute arose.
The shareholder/developer who created the software argued that he was not an “employee” of the company and he created the software as an independent contractor and therefore he was the proper owner of the software because there was no written agreement assigning the code to the company. On the other hand, the company argued that the software developer should be considered an “employee,” and therefore all software code automatically belonged to the company as works-made-for-hire – even though the developer was not paid any cash salary, but was only compensated by company stock.
Business litigation doesn’t solve all problems
After five years of expensive litigation, including a move from State Court to Federal Court, a bench trial and an appeal to the 9th Circuit (very expensive events for any small business) the court ultimately ruled in favor of the company and found that the shareholder/developer was an “employee” despite the fact that he worked in another state, made his own hours and was never paid a wage salary. As a result the Company was determined to be the correct owner of the source code. However, because the shareholder/developer did not use or disclose the software to anyone else, the Court found that no damages should be awarded.
Lesson for all startups: get it in writing
The lesson here is that if the company had documented the relationship between the founders from the beginning they could have avoided the enormous costs and distractions of this lawsuit. A set of startup founder agreements and invention assignment agreements and employment agreements could have been drawn up for a relatively small upfront fee instead of the hundreds of thousands of dollars invested in needless business litigation. Additionally, if proper steps were taken to secure versions of the source code as a practical matter the circumstances of this case may never have arisen. Especially if you have people working on computer programs, designs and other processes that you will incorporate into your business, whether they be your family, co-founders, employees or independent contractors, the best approach is to be very clear about who owns what.
Bottom Line for Tech Startups – Who Owns the Source Code
Take the time to setup your startup the right way, it will save you time and money.