Surprisingly, sometimes you don’t own your own thoughts…
Do you own your idea? Do you have the legal right to take that idea and turn it into a company?
There are a few reasons why the answer might be no. If you are an employee in a large company or another startup, it may be that your current employer owns any ideas created on company time or on company equipment or related to the company product. In other cases, it may also be possible that you have signed away your inventions and ideas. If you are working for a college or university, this is very likely true.
It may be that you have signed a “non-compete” as part of your employment agreement, and with that, if your idea is competitive with your current employer, you possibly have a legal problem to solve.
You may also have signed a “non-solicitation” agreement, legally preventing you from hiring any of your current co-workers or even your past co-workers, in the case where you’ve already quit your job.
Do I own my idea? Can I legally start my company?
Before you make the effort to start your company, it is prudent to ensure that you have the legal rights to the ideas underlying your solution.
Check the paperwork you signed with your current and previous employers. If you find anything you do not clearly understand, have it checked by an employment lawyer (your lawyer, not your employer’s attorney). And as you do this, read such agreements not only from your perspective, but also imagine how your employer might interpret the same agreement from their perspective. You may believe you are completely in the clear only to find your employer thinking you are stealing their “intellectual property.”
If you do suspect that the concept is owned by your employer, the proper course of action is to negotiate a license or, if possible, to purchase the ownership of the invention. Payment for either of these options can be made with a percentage of ownership of your company (a.k.a. equity), cash, or a percentage of future revenues.
Bird Watch—[Legalities]: The Bird Watch technology was developed at the University of Washington, paid for by federal grants. As such, the technology is owned by the university, and Bird Watch must obtain a license from the university before selling products based on this research.
Concrete Battery—[Legalities]: The Concrete Battery concept and preliminary research was created on my own time, on my own personal computer, and is unrelated to the areas of business of all my past employers. As such, I believe I am the sole owner of this idea.
Close to Home—[Legalities]: Close to Home was a business plan developed while the founder was an MBA student in my entrepreneurship class. At work, she sells non-disaster real estate. There are thus no known legal issues around the formation of this business.
Ensibuuko—[Legalities]: Ensibuuko was developed from scratch in Uganda, by employees of the company, after it was incorporated. More importantly, there are many local regulations for financial institutions operating in Uganda, and the company follows those dutifully and carefully.
In most countries, entrepreneurs must ask permission from their government to operate a business. This process is called “incorporation.” In the United States, the rules and regulations of corporations are defined by each individual state, not by the federal government. In Canada, you can choose whether to incorporate as a federal or provincial corporation. In Great Britain, Nigeria, and Tanzania, all corporations are registered with the federal government. In China, many companies are incorporated in Hong Kong, even when they operate only on the mainland.
There are many reasons for incorporating your company, but by far the most important is the limitation of liability. In English, what this means is that if a customers or vendor or employee gets upset and sues your company, the company is responsible (a.k.a. liable) for any losses, not you personally. Your house and other wealth are thus protected behind the corporate veil from such lawsuits, as is the wealth of any of your employees or investors. This protection is why corporations were first invented back in the 1600s.
The laws defining the rules and regulations of corporations are complicated and vary from state to state and country to country. In many places, it is possible to incorporate your company yourself, but with all the complexities, I highly recommend hiring a lawyer to do that work. Get additional advice from a tax accountant.
For socially-minded businesses in the United States, the complexities continue to grow. One new option in many states is to apply to be a benefit corporation. In Delaware, the equivalent is the public benefit corporation; in my home state of Washington, the social purpose corporation. If the purpose of your business is not necessarily to maximize profits, take a look at these corporate forms.