Mike Jabbawy

Cash burn. Two words that keep founders up at night and inevitably force them to at least consider outsourcing all or a portion of their start-up’s software development to an independent contractor (“IC”), as opposed to incurring the costs of adding another technical co-founder or employee on payroll (not to mention the time and energy those searches take). With more and more development shops/moonlighting developers to tap into in the marketplace (domestically and abroad), its no surprise that more and more start-ups are turning to outsourcing opportunities.

If you are beginning to head down this path, there are some key considerations to discuss with your attorney at the outset, none more critical, however, than ensuring that there are no roadblocks to your company owning outright the IP in the work delivered by the IC. Anything short of that fact will result in a surefire way to jeopardize your company’s ability to close future financings/exit without exposure to future claims of IP infringement. So you might be thinking: “I am all set, the form consulting agreement my lawyer provided me has clear language that the IC’s deliverables are work for hire and therefore assigned (along with all associated IP) to my company.” Think again.

The classic example - The IC you engage is moonlighting as a part-time developer, but has a full-time day job as an employee at Company X. The IC’s overreaching employment agreement with Company X states that any software created while employed at Company X, belongs to Company X, regardless of whether the software is developed “on the side” or related to the current business of Company X. You never establish this fact upfront with the IC, the IC develops the software, and on the eve of closing your Series A financing, you receive a letter from Company X claiming they own the IP delivered by your IC. Yikes.

TAKE AWAY: When you are considering engaging an IC, it is absolutely critical to ask up front whether the IC is under any other arrangement (employment or otherwise) with a third party that would in any way restrict the IC’s ability to freely assign to your company the deliverables and associated IP created on your behalf. If so, your alarm should go off...

...time to call your lawyer!