Can A Former Co-Founder Use Company IP In Their New Business?

When a founder leaves a business, it doesn’t necessarily need to be some dramatic exit surrounded by complex legal paperwork. If you’ve done the legal work beforehand, everyone should have a reasonably clear idea of what belongs to the business, what happens when someone leaves and where the boundaries are afterwards.

Sometimes, however, those boundaries can get blurred.

A co-founder leaves for a new venture, everyone wishes them the best of luck and a few months later, you notice something in their new business that feels strikingly familiar. Maybe it’s software they helped build, a design, written material or another asset your company has been using for years.

Can they simply take it because they helped create it?

Usually, the first question isn’t whether they were involved in creating the IP. It’s who actually owns it.

What Actually Counts As IP?

A business can build up a lot of valuable assets over time, but they don’t all have the same legal protection.

Intellectual property can include things such as trade marks, software code, website content, graphics, databases, product designs, inventions and other original works. Different types of IP are protected differently. Copyright generally arises automatically in eligible original works, while other rights, such as patents and registered trade marks, involve separate registration systems. The UK also recognises registered and unregistered design rights in certain circumstances.

Then there are valuable things that may not neatly fall within one of those IP rights, such as pricing information, internal systems, customer information, product plans and commercial strategies. Depending on the circumstances, these may instead be protected as confidential information, know-how or trade secrets.

This distinction matters when a founder leaves.

A company doesn’t automatically own everything a founder knows simply because they learned it while building the business. Their general skills, experience and industry knowledge are different from taking company-owned code, copying protected materials or using confidential business information.

Before asking whether a former founder is allowed to use something, you therefore need to work out what the asset actually is and what legal rights protect it.

Who Actually Owns The IP A Founder Creates?

This can be more complicated than it sounds.

Being a "founder" doesn’t itself determine who owns something. A founder might also be a shareholder, director, employee or contractor - sometimes several of those at once.

For copyright, the general starting point under the Copyright, Designs and Patents Act 1988 is that the author of the work is the first owner. However, where a copyright work is created by an employee in the course of their employment, the employer will generally be the first owner unless there is an agreement to the contrary.

Contractors and freelancers can be different. Someone working under a contract for services will generally retain copyright in what they create unless there is a contractual arrangement transferring those rights. Simply paying someone to create something for the business does not necessarily mean the company automatically owns the copyright.

The same problem can arise with founders.

If one founder developed the original software before their role was properly documented, another created the branding and someone else registered a trade mark personally, the fact that the company has been using those assets does not necessarily answer every ownership question.

IP can also be jointly owned. Where several founders have contributed to creating an asset, questions around joint authorship or ownership may arise depending on the type of IP, their contributions and the agreements in place.

This is why getting ownership onto paper matters.

A tailored IP Assignment Deed can be used to transfer relevant IP rights to the company. For copyright specifically, section 90 of the Copyright, Designs and Patents Act 1988 requires an assignment to be in writing and signed by or on behalf of the person assigning it.

Your Shareholders Agreement, employment agreements and contractor agreements can also help make it clear how IP created for the business will be treated.

The important thing is not to assume that "we all built it together" means the company automatically owns everything.

What If The Founder Created It Before The Company Existed?

This is particularly common with startups.

Two founders might spend months building a product before they ever incorporate a company. One develops the prototype, another writes the code and together they create the brand.

Eventually, they register a limited company and start running the business through it.

The problem is that incorporating the company does not, by itself, transfer everything the founders created beforehand into the new company. The ownership position still needs to be considered and, where necessary, the relevant IP rights transferred.

An IP Assignment Deed can help formalise that transfer so the company owns the relevant rights rather than simply operating with assets still owned by individual founders.

This can become important long before anyone falls out.

If the company later raises investment or is sold, a buyer or investor may want to establish whether the business actually owns the software, brand, technology or other IP its value depends on. An unresolved question about founder-created IP can quickly become something that needs to be untangled during due diligence.

Can A Former Founder Use The Same IP In A New Business?

If the relevant IP belongs to the company, generally, a former founder cannot simply take or reuse it without permission just because they helped create it.

Helping build an asset does not necessarily mean that individual still owns it.

However, there are some important qualifications.

First, the company needs to actually own the relevant rights. If ownership was never properly transferred, the former founder may still own some or all of the IP, there may be joint ownership, or the company may only have permission to use it.

Second, you need to identify what the former founder has actually used.

Taking company-owned source code is very different from using the programming skills someone developed while working there. Copying protected material is different from independently developing something that draws on the same general idea, skills or experience. Whether there is an infringement will depend on the type of IP involved and what has actually been used.

There may also be a licence or another agreement giving the former founder permission to continue using particular material.

So, while "I created it originally" does not automatically give a former founder the right to take company-owned IP with them, something looking similar does not automatically mean the company's IP has been infringed either.

The ownership documents, the type of IP and exactly what has been reused all matter.

What About Confidential Information And Business Know-How?

Not every valuable piece of information a founder takes with them will be an IP ownership issue.

A departing founder might know your pricing, customer information, product roadmap, internal systems, supplier arrangements, technical processes or plans that have never been made public.

Depending on the circumstances, that information may be protected as confidential information or know-how, while particularly valuable secret business information may qualify as a trade secret. Contracts can provide another layer of protection.

Importantly, this means protection does not necessarily depend entirely on having a standalone NDA.

A Non-Disclosure Agreement or confidentiality clauses within shareholder, employment or contractor agreements can make the boundaries much clearer by setting out what information needs to stay confidential and how it can be used.

This can be particularly useful with founders because they often have access to almost everything happening inside the business.

At the same time, there is an important difference between genuinely confidential company information and somebody's general knowledge and experience. Leaving a company does not mean a founder has to forget everything they learned about the industry.

That is why identifying what really needs to stay confidential, and putting appropriate protections around it, matters.

What If The Co-Founder Was Also A Director?

For a limited company, a co-founder may also be a company director.

That introduces another layer of legal duties.

Under section 172 of the Companies Act 2006, a director must act in the way they consider, in good faith, would be most likely to promote the success of the company. Directors are also subject to a duty under section 175 to avoid situations where they have, or may have, an interest that conflicts with the interests of the company.

That conflict duty is especially relevant where a founder is preparing their next venture while they are still a director.

Section 175 specifically applies to the exploitation of property, information or opportunities. So, depending on the circumstances, using an opportunity or information gained through one company to benefit another venture may raise directors' duty issues as well as questions about IP ownership or confidentiality.

Leaving the board does not necessarily make every issue disappear either.

Under section 170 of the Companies Act 2006, certain duties continue to apply after someone stops being a director. In particular, a former director remains subject to the section 175 duty in relation to exploiting property, information or opportunities they became aware of while they were a director.

That does not mean a former director is automatically prevented from starting another business or competing with their old company.

It does mean that what they take or use, how they became aware of it and when the conduct occurred can matter.

There may also be contractual obligations to consider separately, including confidentiality provisions and any other post-exit restrictions that apply in the circumstances.

Sort Out The Ownership Before You Need To Rely On It

Ideally, your business should not first be trying to work out who owns its most important assets after a co-founder has already left.

Founder-created IP should be identified early and, where the intention is for the company to own it, the necessary transfers should be properly documented.

Employment and contractor agreements should also deal with IP appropriately. Confidential information should be identified and protected, and a tailored Shareholders Agreement can help set expectations around the relationship between founders and what happens when somebody leaves.

When a founder does leave, it can also be worth checking that outstanding IP issues have been dealt with, access to company systems and materials has been addressed, and everyone understands the obligations that continue afterwards.

Where the founders have agreed the terms of an exit, a Co-Founder Separation Agreement can also document matters such as shares, IP, confidentiality and the handover process.

For IP, however, the main lesson is simple: don't rely on assumptions about who owns what.

The paperwork is much easier to sort out while everyone is still building the business together than after someone has left and launched the next one.

Need Help Protecting Your Company's IP?

If you're building a business with co-founders, it’s worth making sure everyone is clear on who owns the IP and what happens to it if somebody eventually leaves.

Sprintlaw can help with IP Assignment Deeds, Shareholders Agreements, Non-Disclosure Agreements, Co-Founder Separation Agreements and other legal documents tailored to your business.

If you would like a consultation on protecting your company's IP, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.