Common IP Pitfalls for Startups Building Apps & Collaborate with Developers
By Blair Beven | Principal Partner & Giulia Didonè | Trade Mark Attorney
A common misconception we see with startups is that hiring developers to create an app means the startup has full ownership rights to the final product simply because they hired them.
However, it’s crucial to check if intellectual property (IP) ownership has been established and what the terms and conditions are. We often observe that growth-oriented startups, especially in their early stages, focus on innovation, scalability, and speed. This focus can lead to confusion about who owns the IP rights and neglecting ownership at key stages.
Regardless of the app’s status, startups must consider the risks of working with developers. Who exactly owns the IP you are creating? Are there any third-party software or assets used, and who owns them? If the project ends early, where is the IP transferred to?
In this article, Principal Blair Beven and Trade Mark Attorney Giulia Didonè follow up on our previous article, ‘Common IP Mistakes Startups Make & How to Prevent Them,’ and explore in depth the pitfalls that startups should look for when engaging with developers and agencies.
Unclear IP Ownership: Developers Own the IP to the Final Product If Not Specified
The main pitfall that we see from startups when working with developers is the mistaken assumption that they automatically own the intellectual property (IP) in the final product simply because they hired the freelancer or agency to work on their product and the idea they came up with.
However, even if you come up with the idea for your app, you may not automatically own the copyright in the final product unless you take appropriate legal steps to secure ownership. Under Australian law, unless there is a written agreement assigning the rights, the developer will typically retain ownership of the IP they create. [1]
To avoid future disputes on this, it is best practice to work with a legal professional early in the process to draft terms of engagement or a development agreement, though which identifying the IP with clear definitions, set out the terms of ownership and usage rights, and regulate the transfer conditions if termination of the contract occurs
The first question a potential investor will likely ask you as well is: do you own the IP, and if so, have you established a contract with your developers? If your answer relies on assumptions rather than a written agreement, it may raise serious concerns during due diligence and potentially undermine investor confidence.
Pre-existing IP and Third-Party Components
It is also important to note that developers often incorporate pre-existing code or third-party components into your app. This can significantly impact your ability to commercialise or license your product. Before development begins, you should discuss with the developer whether any third-party tools or code will be used, understand the licence terms attached to those components, and ensure your rights of use are clearly defined in your agreement.
You may need to obtain separate licences from the owners of any third-party software. Failing to do so can expose your startup to legal risks, including copyright infringement claims, compliance issues, or even the loss of key functionality if the software is discontinued or becomes insecure.
What Happens if the Project Ends Early?
In case of early termination, the question becomes who owns the completed work and under what terms? Unless the developer has signed an agreement stating that you are the owner of copyright, and so without clear terms regulating the IP ownership, the default position under the Copyright Act 1968 (Cth) is that the author, i.e., developers retain the ownership instead of the client.[2]
A well drafted termination clause in the development agreement prevents this uncertainty as it makes each party’s rights and obligations clear even if the project ends before its completion, regulating aspects such as who owns any work completed prior to termination or whether payment is required for partial work.
Ambiguity with Licensing Terms
Ambiguity around software licensing is another common issue for startups. Problems frequently arise around the scope of the licence, the distinction between licence vs. ownership, and usage rights, such as the ability to modify, sublicense, or commercialise the software.
If these issues are not addressed upfront, they can lead to costly disputes about who can use the software, modify it, and profit from it. Agreements between startups and developers must specify versions of the software, terms on updates, bugs, and support as well as retained ownership in case of IP fallouts.
Non-Disclosure Agreements (NDAs) and Confidentiality Clauses: Why They Aren’t Enough for IP Ownership
NDAs and confidentiality clauses are vital to protect startups from revealing sensitive information and risking market share. However, even though they legally bind developers from breaches, they do not equate to ownership of the IP created. Startups require a separate IP assignment agreement to protect ownership from other parties involved and lower the risk of disputes and loss of control over core assets for the firm.
To protect your startup from IP risks when designing an app, software, and even a website, ensure to have a development agreement that will transfer the IP ownership to you when the app is complete, to conduct due diligence in third-party codes, to register trade marks for the app, and always use NDAs and IP agreements to avoid disputes.
Therefore, taking the time to understand the basics of IP for collaboration, what IP rights you are protecting, and working with an IP law firm (like us at XVII Degrees) can save you from making these common mistakes and protect your startup from IP pitfalls when working with developers.
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References:
[1] The Copyright Act (1968) (Cth). Retrieved from https://www.legislation.gov.au/C1968A00063. Contains two references to the commissioning rule: section 35(5) which relates to photographs for a private or domestic purpose, paintings or drawings of a portrait or engraving, and sections 97(3) and 98(3) for cinematographic film and sound recording. All the other works not mentioned in section 35(5), including literary works under which software is protected, are regulated by the rule that the creator of a work is the first owner of copyright in it. So, in the case of software, the first owner of copyright will generally be the developer.
[2] Section 35 of the Copyright Act (1968) (Cth). Retrieved from https://www.legislation.gov.au/C1968A00063.
Featured Image by Miguel Alcântara on Unsplash
