Assigning Pre Incorporation Software Rights In Early Stage Ventures
Software created before incorporation belongs exclusively to individual authors under statutory law until formal written instruments transfer title to the entity.
unassigned source code risk
Meaning
Legal title vulnerabilities emerge when a company utilizes software that has not been formally transferred to its ownership by the developers. This specific vulnerability, known as unassigned source code risk, arises when founders write code before incorporation without signing assignment agreements. It can lead to ownership disputes that prevent the company from licensing its product or securing investment.
Transaction Failure
Diligence reviews by venture capital lawyers often uncover these gaps in ownership during funding rounds. If the unassigned source code risk is present, the investors will refuse to close the transaction until the ownership is resolved. This refusal can delay funding and put the startup’s survival at risk.
Remediation Effort
Resolving ownership gaps requires locating all original developers and having them sign retroactive technology assignment documents. This process can be difficult and expensive if a developer has left the team on bad terms and demands cash or equity to sign. In extreme cases, the company must rewrite the affected parts of the software from scratch to eliminate the unassigned source code risk.
This remediation can delay product launches by several months and consume valuable engineering resources.
Prevention Process
Standard operating procedures require that all developers sign intellectual property assignments before writing any software for the company. These agreements should be signed by everyone, including founders, employees, and independent contractors. This simple administrative step ensures that the company owns the entire codebase from the beginning.