When Co-Founders Resign: Who Owns the Code and Intellectual Property?

When Co-Founders Resign: Who Owns the Code and Intellectual Property?

Startups often begin with energy, shared vision, and a sense of collaboration between founders. However, when one co-founder resigns, especially a technical co-founder who has written code, the question of who owns the intellectual property (IP) can quickly become a contentious and high-value dispute.

This is a common scenario for early-stage businesses, and without the right agreements in place, the outcome can be uncertain. Below, we outline the key issues around co-founders leaving a business and how ownership of intellectual property, such as code, is determined.

Why Intellectual Property Matters for Startups

For most technology startups, the product, the code, brand or unique functionality, is the most valuable asset. If ownership of that product is unclear, it can:

• Jeopardise investment rounds;
• Delay or prevent product launches;
• Lead to costly disputes between former founders; and
• Risk competitors gaining access to the same ideas or technology.

Ensuring the company, rather than any individual, owns the IP is therefore fundamental to protecting its value.

Code Written by a Technical Co-Founder

Where no formal agreement exists, disputes often arise over whether code written by a co-founder belongs to the company or to that individual. Some important considerations include:

• Timing of development:  Was the code written before or after the company was incorporated? Work carried out for the business after incorporation is more likely to be treated as belonging to the company.
• Capacity of the co-founder:  Was the work undertaken as part of their role as a director, officer, or de facto employee? Courts may find that IP developed in this context belongs to the company.
• Contribution of both parties:  Even if one founder wrote the code, contributions from another, such as product design, architecture, and training data, may support the argument that the IP is jointly created for the company.
• Company resources:  If business systems, GitHub repositories, or communications channels of the company were used, this strengthens the company’s claim to ownership.

The Importance of a Founders’ Agreement

A well-drafted shareholders’ agreement should:

• Clearly state that all IP created for the business is automatically assigned to the company.
• Set out what happens if a founder leaves, including how their shares are treated.
• Reduce the risk of disputes by providing agreed processes for resolving disagreements.

Without this agreement, parties must rely on general principles of company and IP law, which are often less predictable and more expensive to enforce.

Implied License and Directors’ Duties

Even without a signed agreement, there are legal arguments that can help protect the company:

• Implied license: Courts can infer that IP created for the benefit of the company was intended to be used by the company for the purposes as initially intended by the company and founders.
• Directors’ duties: Company directors must act in the best interests of the company. Attempting to walk away with valuable IP, or setting up a competing business with it, could be a breach of those duties.

Avoiding and Resolving Disputes

If you find yourself in this situation, the following steps are key:

• Gather evidence: Keep records of communications, documents, and contributions that show the product was developed for the company.
• Seek early advice: Specialist legal input can help prevent matters escalating.
• Negotiate where possible: Buying out a departing founder’s shares and formalising IP ownership may be the most practical solution.

How We Can Help

Disputes over code and intellectual property are common when startup founders part ways. While it is always best to have clear agreements in place from the outset, there are still legal protections available to prevent valuable IP walking out the door with a departing co-founder.

At the Jonathan Lea Network, we regularly advise startups facing these issues. If you are concerned about IP ownership or the departure of a co-founder, our team can guide you through your options and help secure the future of your business.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.

 

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