For many startups, intellectual property is the primary driver of enterprise value. The software architecture, proprietary systems and data assets developed in the early stages form the foundation for future growth, strategic partnerships and access to capital.
Despite this, ownership is often assumed rather than formally or correctly documented. As startups prioritise development and speed to market, documentation and structural alignment are often deferred.
When intellectual property ownership is not properly structured, it can – and frequently does – create issues as a startup scales, particularly during capital raises, strategic transactions and exit events. Any gap between commercial reality and legal structure can introduce delay, additional cost and unnecessary complexity at critical growth stages. This article outlines the most common ownership gaps and the structural steps required to resolve them before they become transactional obstacles.
Founder IP
One of the most common ownership gaps our startup lawyers see arises at the very beginning of the company’s lifecycle.
Founders often develop early-stage software, product architecture, algorithms or brand assets in their personal capacity. Once the company is incorporated, those assets are adopted and used by the corporate entity. In legal terms, that IP remains owned by the individual founder unless it is formally assigned to the company (which it typically isn’t at the start).
The issue is not confined to pre-incorporation work. Founders frequently continue contributing to the business without a written employment or services agreements in place and without having entered into a deed of IP assignment. In the absence of clear contractual assignment, ownership of work created during that period may also sit personally rather than with the company. These gaps are commonly identified during capital raises and exit processes, when due diligence requires clear evidence that the company holds full legal title to its core assets.
The fix is straightforward: ensure that all intellectual property created by founders (whether before or post incorporation) is formally assigned to the company through a properly drafted deed of assignment. Properly drafted employment or services agreements may also be necessary depending on needs. While these can be done at any stage, it is far preferable to address ownership early rather than during a live capital raise or transaction when the pressure is on. Investors and counterparties will expect clear evidence of ownership. If documentation is incomplete, closing timelines can be extended and additional cost and complexity introduced. Early engagement with one of our experienced startup lawyers can help ensure IP ownership is properly documented and the company is prepared for investor or transaction scrutiny.
Contractor and Developer IP Assignments
Startups frequently rely on contractors during the initial growth phase. This includes freelance developers, offshore engineers, design agencies, consultants and marketing providers.
Unlike employees, contractors do not automatically transfer ownership of intellectual property to the engaging company. Under Australian law, intellectual property created by an independent contractor will generally vest in the contractor unless there is an express contractual assignment.
This distinction is frequently misunderstood and is a recurring issue our startup lawyers see during capital raises, due diligence reviews and exit processes.
Where no effective assignment exists, the contractor legally owns part of the company’s core technology, design assets or proprietary materials. Even where agreements are in place, drafting deficiencies can create uncertainty or, in some cases, fail to effectively transfer ownership to the company.
Ownership risk in contractor arrangements can be avoided with clear, properly drafted agreements. Each engagement should expressly assign to the company all intellectual property created for the startup and clearly identify any pre-existing materials retained by the contractor, and include any agreed licensing back arrangements. Ideally, these matters should be agreed before work begins, not addressed retrospectively.
It may be possible to remediate deficiencies retrospectively, but this is not always straightforward. The process becomes more difficult over time, particularly where contractors are no longer engaged or are located offshore. There is no guarantee that a contractor will agree to execute a retrospective assignment. Properly drafted and executed IP assignment clauses at the outset significantly reduce this risk and avoid later issues with assignment.
IP created by Employees and under Labour Hire Arrangements
Under Australian law, copyright in works created by an employee in the course of employment will generally vest in the employer, subject to any agreement to the contrary. However, this does not eliminate the need for clear contractual documentation.
During due diligence, investors and their advisers will expect clear written evidence that intellectual property created by employees is owned by the company, typically through express assignment provisions in employment agreements. Well-drafted employment agreements should include comprehensive invention and copyright assignment provisions, address ownership of inventions developed in the course of employment, include moral rights provisions and deal expressly with any pre-existing intellectual property brought into the business.
Ownership risks are not confined to traditional employment arrangements. They also arise in labour hire and quasi-employment structures, where startups engage individuals through labour hire providers, consultancy agreements or informal contractor arrangements while treating them operationally as part of the internal team.
Under Australian law, the classification of the relationship matters. The statutory presumption that copyright created in the course of employment vests in the employer applies to employees, not contractors. Where an individual is engaged through a labour hire company or consultancy arrangement, ownership may vest in the labour hire entity or the individual, depending on the contractual structure.
As with other documentary gaps, these matters commonly arise during capital raises and exit processes, when intellectual property ownership is closely examined. Our startup lawyers frequently encounter these deficiencies at the due diligence stage, where rectification becomes a prerequisite to completion. The solution lies in ensuring that employment, contractor and labour hire agreements contain effective intellectual property assignment provisions and appropriate moral rights consents, and that existing arrangements are reviewed by startup lawyers to confirm IP ownership flows properly to the company.
IP Held in the Incorrect Entity
Another common structural issue our startup lawyers come across is where the intellectual property was developed in a prior entity or is held in a related company or trust, rather than in the operating company.
This can occur where a company has restructured, pivoted, or incorporated a new entity for investment purposes. In other cases, assets are deliberately separated for asset protection or tax reasons.
During capital raises, investors will expect the core intellectual property to sit with or be clearly controlled by the entity they are investing in. If ownership resides in a separate entity without a formal transfer or robust licensing structure in place, this can delay the transaction while ownership is clarified or restructured.
Where a transfer is required, additional documentation, corporate approvals and tax considerations may arise. Even where a licensing model is retained, investors will scrutinise whether the arrangement provides sufficient control and certainty. Rectifying ownership, restructuring or implementing robust intercompany agreements at that stage can involve significant additional cost and delay, and can involve assignment deeds, intercompany licensing agreements, tax advice and corporate approvals. Obtaining advice early helps ensure that intellectual property is held in the appropriate entity and structured correctly before external scrutiny arises. This is often the simplest and most cost-effective preventative approach, particularly given that transferring IP at a later stage may trigger tax consequences or require more complex restructuring.
Key Takeaways
For startups and scale-ups, intellectual property ownership should be deliberate, documented and aligned with the company’s operating structure from the outset.
Common gaps arise where IP is created before incorporation, developed by contractors without effective assignments, contributed by labour hire personnel without clear assignment provisions, or held in related entities rather than the operating company. These issues are frequently only identified during capital raises and exit processes, when ownership is scrutinised in detail and remediation can introduce delay and cost. Early engagement with our experienced startup lawyers helps ensure ownership is properly documented and aligned before external review occurs – reach out to us here if you feel like chatting.
