Owning Your IP: IP Assignment for Founders and Contractors, Trade Secrets, and Tax
Updated: 4 hours ago
By Trenton Roberts and Autumn Hartman
Circular 230 / general information notice. This article is general information only. It is not tax, legal, or accounting advice. Reading it does not create an attorney-client relationship. Tax results depend on your facts and on law that can change. Consult your own attorney and CPA before taking any action. This article was not written to be used, and cannot be used, to avoid tax penalties.
A clean IP assignment chain is one of the first things a buyer or investor checks in diligence, and one of the most common places a deal slows down. The company assumes it owns its code, its product designs, and its customer know-how because it paid for them. Copyright and patent law do not work that way. Ownership starts with the person who created the work or conceived the invention, and it moves to the company only through employment rules or a signed writing. This article covers how to close the gaps for founders, employees, and contractors, how to protect what cannot be patented or registered, and the tax rules that now turn on who owns what.
Work made for hire is narrower than most contracts assume
Under the Copyright Act, the author owns the copyright unless the work is a "work made for hire." Section 101 of Title 17 defines two kinds. The first is a work prepared by an employee within the scope of employment. The second is a specially ordered or commissioned work, but only if it falls into one of nine listed categories and the parties expressly agree in a written instrument signed by both that it is a work made for hire. The nine categories are a contribution to a collective work, part of a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test, and an atlas.
Software, a logo, a marketing site, and most product design work are not on that list. A contractor agreement that simply labels the contractor's code a "work made for hire" usually does not make the company the author. What saves the company is a present assignment of all right, title, and interest, signed by the contractor. Section 204(a) requires a transfer of copyright ownership to be in a writing signed by the owner.
Whether someone is an employee for this purpose is decided under common-law agency principles, as the Supreme Court held in Community for Creative Non-Violence v. Reid, 490 U.S. 730 (1989). A person paid on a 1099 who controls how and when they work is often not an employee, even if the company calls them one. Our drafting rule is simple: every agreement with anyone who creates anything for the company includes both a work-made-for-hire clause, for whatever it covers, and a backup present assignment.
IP assignment for founders and pre-formation work
The most common gap we see is the founder's own work. A founder who writes the first version of the product in a garage, before the LLC or corporation exists, owns that code personally. If the company is later formed and nobody signs an assignment, the founder still owns it. That creates a problem when the founder leaves, and it creates a diligence finding the day a buyer reads the cap table.
The fix is an IP contribution or assignment agreement signed at formation, with a schedule describing the pre-formation work. The tax treatment depends on how the transfer is structured. A contribution of property to a corporation in exchange for stock can be nonrecognition under Section 351 if the transferors control the corporation immediately afterward, and a contribution to an LLC taxed as a partnership is generally nonrecognition under Section 721. Services are not property, so stock issued for future work is compensation, not a Section 351 exchange. Get the CPA involved before founders sign, especially if one founder contributes IP and another contributes cash.
Record what you can. Under 35 U.S.C. 261, a patent assignment is void against a later purchaser or mortgagee for value without notice unless it is recorded in the Patent and Trademark Office within three months of its date or before the later purchase. Recording a copyright transfer with the Copyright Office under 17 U.S.C. 205 gives constructive notice once the work is registered.
Invention assignment clauses that actually assign
In Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, 563 U.S. 776 (2011), a researcher had signed one document saying he "agree[d] to assign" his inventions to Stanford, and a later one with a company saying he "do[es] hereby assign" them. The present assignment to the company won. The wording matters. An employee invention agreement should say the employee "hereby assigns" future inventions, with a promise to sign further documents and a limited power of attorney so the company can sign them if the employee cannot be found.
Other provisions we look for:
A prior inventions schedule. It protects the employee's real pre-employment work and protects the company from a later claim that something was pre-existing.
A clear scope. Inventions related to the company's business or developed with its resources or on its time. An overbroad clause that reaches everything the employee ever creates invites a fight.
State law limits. California Labor Code Section 2870 and similar statutes in several other states make unenforceable any assignment of inventions an employee develops entirely on personal time without company resources, unless they relate to the employer's business or result from the employee's work. Texas does not have a general statute of that kind, but if your engineers live in one of those states, their agreement needs the required carve-out and notice.
Moral rights and waivers for creative work, and a confidentiality obligation that survives termination.
Protecting trade secrets under the DTSA and TUTSA
Much of a company's value is know-how that is never patented: pricing models, customer lists, source code kept private, and manufacturing methods. Two statutes protect it. The federal Defend Trade Secrets Act of 2016, codified at 18 U.S.C. 1836 and following sections, creates a federal civil action for misappropriation. The Texas Uniform Trade Secrets Act, Chapter 134A of the Texas Civil Practice and Remedies Code, provides the state law claim. Under both, information qualifies only if it derives independent economic value from not being generally known and the owner took reasonable measures to keep it secret.
"Reasonable measures" is where companies lose cases. Courts look at what you actually did. A practical baseline:
Confidentiality agreements with employees, contractors, and anyone else given access.
Access controls that limit sensitive files to people who need them, with logging.
Marking key documents confidential, without stamping everything so the label means nothing.
Exit procedures: return of devices, a certification that files were deleted, and disabling access the same day.
Onboarding questions for new hires about what they brought from a prior employer, so you are not importing someone else's secrets.
One DTSA requirement is easy to miss. Under 18 U.S.C. 1833(b), an employer must give notice of the statute's whistleblower immunity in any contract or agreement with an employee that governs the use of trade secrets or other confidential information, or cross-reference a policy that contains it. The statute defines "employee" to include contractors and consultants. If the employer does not give the notice, it cannot recover exemplary damages or attorney's fees under the DTSA against an employee to whom notice was not provided. The requirement applies to contracts entered into or updated after May 11, 2016. Adding one paragraph to your template fixes it.
The tax angle, part one: Section 174A and research spending
For tax years beginning after December 31, 2021, the 2017 tax act required companies to capitalize research and experimental expenditures under Section 174 and amortize domestic costs over five years and foreign costs over fifteen. Software development costs were included. For many software companies, that rule created taxable income in years when they had little or no cash profit.
The One Big Beautiful Bill Act added Section 174A. For tax years beginning after December 31, 2024, domestic research or experimental expenditures can be deducted in the year paid or incurred, or a company can elect to capitalize them and amortize over at least 60 months. Foreign research remains under Section 174 and is still amortized over 15 years, which makes where your developers sit a tax question.
The Act also included transition relief, and the IRS explained the procedures in Rev. Proc. 2025-28. A company with average annual gross receipts of $31 million or less that is not a tax shelter can elect to apply the new rules retroactively to tax years beginning after December 31, 2021, generally by amending returns. According to the Taxpayer Advocate Service, the deadline for that election is generally the earlier of July 6, 2026, or the normal refund claim deadline. Any taxpayer with unamortized domestic costs from those years can instead deduct the remaining balance in the first tax year beginning after December 31, 2024, or ratably over two years.
A worked example. A calendar-year company spent $2,000,000 on domestic software development in 2023. Under the old rule it deducted 10 percent ($200,000) in 2023 under the midyear convention and 20 percent ($400,000) in 2024, leaving $1,400,000 unamortized. It can deduct the full $1,400,000 on its 2025 return, or $700,000 in 2025 and $700,000 in 2026. If it qualifies as a small business, it may instead amend 2023 and 2024 to deduct the costs when they were spent, which can produce a refund. Research credit and Section 280C interactions need to be modeled at the same time.
Ownership drives this. IRS guidance on contract research, including Notice 2023-63, generally looks at whether the party performing the work bears financial risk and holds rights in the results. Your development agreements should make it clear which party bears the risk and owns the output, because that can determine who has the deduction.
The tax angle, part two: patents, Section 1235, and capital gain
Since the 2017 tax act, a patent, invention, model or design, or secret formula or process held by the taxpayer whose personal efforts created it is excluded from the definition of a capital asset under Section 1221(a)(3), for dispositions after December 31, 2017. Sold outright, that property generally produces ordinary income for the creator.
Section 1235 remains the exception for individual inventors. A transfer by a "holder" of all substantial rights to a patent, or an undivided interest in all substantial rights, is treated as a sale of a capital asset held for more than one year. It applies even if the payments are periodic or contingent on the buyer's use of the patent. A holder is the individual whose efforts created the property, or an individual who bought an interest from the creator for money before the invention was reduced to practice, as long as that buyer is not the creator's employer or related to the creator.
The limits matter for founders. Section 1235 does not apply to a transfer to a related person, and for this purpose an individual and a corporation are related if the individual owns 25 percent or more of the corporation's stock, directly or indirectly. A founder who owns 30 percent of the company and licenses or sells a patent to it generally does not get Section 1235 treatment. A transfer that keeps significant rights, such as a limited field of use or the right to terminate at will, can also fail the "all substantial rights" test under the regulations. And if the invention was assigned to the company under an employee invention agreement from the start, the individual never owned it, so there is nothing to sell.
Copyrights and trade secrets do not get Section 1235 treatment. A founder's self-created copyright is also excluded from capital asset status under Section 1221(a)(3).
A short sequence for a company that wants a clean chain
List every person who created code, designs, content, or inventions for the company, including founders before formation.
Collect signed assignments from each one, using present assignment language.
Record patent assignments within three months, and register and record copyrights where it makes sense.
Add the DTSA immunity notice to employee, contractor, and consultant templates.
Document reasonable trade secret measures and actually follow them.
With your CPA, decide how to use Section 174A and the transition rules, and line up development contracts with the tax position.
Our trademark services page covers brand protection, which is the other half of most IP programs.
If you are preparing for a raise, a sale, or a hire and want the chain checked, email info@robertsandwillie.com or call (469) 910-4017. Sending a message does not create an attorney-client relationship.
Disclaimer. This article is for general information only and is not tax, legal, or accounting advice. It does not create an attorney-client relationship. Tax law changes and depends on your specific facts. Do not act on this article without consulting your own attorney and CPA. This article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or other applicable law. Attorney Advertising. Roberts & Willie, PLLC, Dallas, Texas; Trenton Roberts, responsible attorney.
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