What document needs to be signed when engineer leaves startup before the startup is legally incorporated/formed?

Lona Duncan

April 10th, 2013

Does anyone know how to handle a case where the engineer decides to part ways before the company is legally incorporated?  He/she has built code that is happy to leave with the company.  What paperwork needs to be signed to make sure no loose ends are left untied. 

p.s. No compensation was given during the time engineer spent with startup. So have to figure out what is appropriate to pay.

Tony Rajakumar Founder/CEO at SnugBoo

April 10th, 2013

Tread carefully and get a lawyer - legally the code is theirs not yours. You're lucky they are being cooperative. And the next time make sure you get an employment and IP agreement in place BEFORE employment starts. Saves this hassle. Thanks... --Tony

Matthew Cordasco Co-founder and Head of Product

April 10th, 2013

There are some good comments above, and I would simply add a few unstructured tid bits as well.

1) In the past, I have personally owned IP prior to the formation of a corporate entity that I then transfered that IP into the corporation as consideration for the stock I received as a founder.

2) Our council recently reminded me to be aware of the laws governing "minimum wage" - meaning that you should be certain to pay people at least that for any work done.  In my case, we had equity-only agreements.  We added a small cash component to satisfy the laws for minimum wage.

3) In your scenario, instead of retro-active documents, I personally prefer an "Exit Agreement" which is straightforward, plain english and clearly assigns IP, NDA, etc. for consideration either previously provided or provided at the time of signing.

I will now provided all the usual disclaimers that I am not a lawyer, and all this is simply my humble opinion.

Matthew
MyCrowd.com

Chris Murphy Director of Corporate and Legal Affairs at E2open

April 10th, 2013

so first off, yes I AM an attorney, but this NOT legal advice.  :-)

Lots of good information here overall.  One thing you did not note is how important the IP is to your venture.  If it is just general site/app code that is of value but not strategic, you could probably handle this with standard docs.  However, if the IP is a key asset of the company and of strategic importance, I would suck up the cost of a good, local business attorney to make sure you get this locked up tight.  I don't recommend attorneys all the time, but for business critical decisions, it's a cheap insurance policy.  Good luck!

Adam Geller education technology explorer

April 10th, 2013

I am not a lawyer. This is not legal advice.

If there is no corporation, then you are the legal entity. You are trying to ensure that *you* own the IP when the eng leaves. As such, you should sign a work for hire agreement which states the effective date is the date when the work together began. It's not ideal but ok that you're signing this now -- hence the effective date being an important structure of the doc. And as part of the scope of work, you can define the items the eng would have been focused on creating. Your compensation upon meeting those milestones can be the amount you agree upon. These agreements are relatively stock/form in nature.

Later, when you incorporate (with a lawyer) you can transfer the tech as part of your stock purchase agreement. 

Jacob Kojfman Experienced technology and corporate lawyer, focusing on SAAS

July 10th, 2013

Hi Lona, Assignment of the code and a release. You don't want him coming back later and suing. Regards, Jacob Please help me find a cure for breast cancer. Donate here: www.runforthecure.com/goto/jacob Jacob Kojfman 604 318 4539

Mitchell Portnoy Healthcare Information Executive

April 10th, 2013

This is tricky. You could tie the exiting compensation package as consideration for a combination of IP assignment, NDA, and non-compete. Typos courtesy of my iPhone

James Bond CTO at SupplyBetter

April 10th, 2013

Agree with what Tony says, in general -- you should get an assignment of IP in place for *everyone* who is working on development -- this includes employees and consultants. (Note that this is different from an NDA, which is a promise not to reveal IP and other confidential information). Ideally that should be in place before they contribute any effort, to avoid any unpleasantness if they're not cooperative; though it's probably possible to make it apply retroactively (however IANAL). 

However the complication that Lona raises is that the company isn't incorporated yet; so who would they assign it to? This is where I think you may need legal assistance. One possibility would be to sign something agreeing to assign it to the corporation once it's formed, though I'm not sure how you'd word that or make it binding (how would you legally define an entity that doesn't exist yet?). Another would be to assign it to you; then you would assign it (along with your IP) when you form the corp. Ask you friendly attorney.

Another issue -- you mention that no compensation was given. This often happens in startups, where friends and/or prospective co-founders do some work, just to help out or to see if there's a fit. But don't make the mistake of thinking the fact that they haven't been paid means their contribution is free -- as Tony says, they legally own it. And it's my understanding that in order for a contract such an assignment of IP to be valid, there needs to be an "exchange of consideration" -- i.e. they need to get something in return for their assignment. So you may need to pay them something (even if it's $1). Again -- IMNAL.

So one last bit of "paperwork to be signed to make sure no loose ends are left untied", if you really want to be comprehensive -- typically NDA's call for the return or destruction of all confidential material the person has received (or created) upon termination. So getting them to sign something saying they've done so (and re-affirming that they understand and agree to the future non-disclosure terms of the NDA) is the formal thing to do.

Anonymous

April 10th, 2013

As a former developer of said situation, I'd say just a contract ensuring the lack of defamation from both parties and have an appropriate scaling of the time the developer spent writing code and producing necessary work to build said code. Jacky Alciné home.jalcine.me - blog.jalcine.me - linkedin.jalcine.me

Michael Green Partner Technology Manager at Google

April 10th, 2013

As with others above, I'm not a lawyer.  I'll just pass along what I have seen done before (correctly or incorrectly).

1.  Create a founder's agreement with the Founders specifying how you intend to divide ownership, plans to transfer ownership of certain items (like the URL) to the company once it has been legally registered.  The agreement usually spells out how you will handle the departure of a founder.

2.  EVERYBODY working on the effort, signs an agreement to transfer IP rights to the company identified in the founder's agreement once it has been registered.  Probably want to have everyone who signs this sign a new one once the legal entity is formed.

3.  When anyone signing number 2 departs, you should have them sign a separation acknowledging the IP transfer (included as appendix) and other stuff (typically spells out if any compensation is provided as consideration for signing).

James Bond CTO at SupplyBetter

April 10th, 2013

Good points, Matthew. Waiting until the corporation is formed to do the IP assignment (in exchange for initial equity) is indeed the common case, and makes things very clean. You could do that in this case too, if you're confident that your developer will still be agreeable at that time.

Regarding minimum wage -- yes, that's an issue with employees (note that equity doesn't change or reduce this obligation). One big reason for engaging people as contractors in the early stages. Just be sure you pay attention to the legal criteria for whether someone is considered a contractor vs. and employee (the state and/or feds can & sometimes do retroactively re-classify someone as an employee, at which point you owe back payroll taxes, unemployment, etc etc.)