Founder IP assignment and the California carve-out

Move founder work into the company

Founders often write code or develop ideas before the company exists. That work does not automatically belong to the company once it is formed. Under federal copyright law, a transfer of copyright ownership is not valid unless it is in a writing signed by the owner or the owner's authorized agent. Founders typically sign a technology assignment, or include one in their stock purchase agreement, covering prior work related to the business.

Example: A founder builds a prototype on weekends before incorporating, then the company raises a seed round. Diligence asks who owns the prototype code. If there is no signed assignment, the founder still owns the copyright, even though the company has been using it. A short signed assignment, delivered before closing, fixes the gap far more cheaply than a dispute later.

California's limit on employee invention assignments

Labor Code section 2870 says an employment agreement cannot require an employee to assign an invention developed entirely on their own time, without the employer's equipment, supplies, facilities or trade secret information. The carve-out does not cover inventions that relate, at conception or reduction to practice, to the employer's business or actual or demonstrably anticipated research or development, or that result from work the employee performed for the employer.

Section 2870 makes a provision that goes further unenforceable. Section 2872 adds that if an employment agreement requires assignment of inventions, the employer must, at the time the agreement is made, give the employee written notice that the agreement does not apply to inventions that qualify under section 2870. Many companies attach the statute's text as an exhibit to the agreement.

Contractors need a different approach

Section 2870 applies to employees. For independent contractors, ownership depends on the contract. Under the Copyright Act, a commissioned work is a work made for hire only if it falls into one of nine listed categories and the parties agree in a signed writing. Software usually does not fit those categories, so contractor agreements generally need an express assignment of rights.

Be careful with work-made-for-hire wording in California. Labor Code section 3351.5(c) treats a person who contracts for a commissioned work under a written work-made-for-hire agreement as an employer of the creator for workers' compensation purposes, and California's payroll tax agency applies a similar rule. An assignment clause, rather than a work-made-for-hire label, is often the cleaner tool.

Your next steps

1. Have every founder sign a written assignment of prior work related to the business.
2. Include the section 2870 limit and the section 2872 written notice in employee agreements.
3. Use an express IP assignment in contractor agreements and review work-made-for-hire wording.