Startups usually operate on a shoestring budget with a minimum number of employees and resources. Many, if not most, of the formalities of a Fortune 500 company simply don’t exist. Many times even basic formalities don’t exist. So, how does a startup determine who owns software developed by a developer engaged by the fledgling company?
The rules of ownership for software are fairly straightforward. Software created by a developer who is employed by a company is owned by that company. But software created by a developer who is an independent contractor is owned by the independent contractor developer. Under federal copyright law, creative works, which include software, created by an employee within the scope of his or her employment are owned by the employer. This is referred to a as a work made for hire. The relevant issue, then, is whether the developer is an employee.
When it is clear whether the developer is an employee or independent contractor, it is also generally clear whether the software is owned by the company or the developer. But in a startup where formalities surrounding employees are often fuzzy at best, the answer to the question is now always clear.
In a case heard in the Ninth Circuit Court of Appeals, the court considered whether a startup software company owned software being developed by a developer associated with the company, or whether the developer individually owned the software. To the disappointment and frustration of the developer, the court found in this case that, although the startup company did not follow many of the formalities it should have followed to treat the developer as an employee, the developer was still found to be an employee, and therefore, the startup owned the software, not the developer.
To reach its conclusion that the developer was an employee of the startup software company, the court looked at several factors. Perhaps most prominent was that the company was a startup, and the failure to follow certain legal formalities did not weigh as heavily in favor of finding that the developer was an independent contractor as it may have in the case of a more established business enterprise. The court cut some slack to the entrepreneurs struggling to work through the startup phase. The court in essence recognized the reality of entrepreneurship.
Specifically, in finding that the developer was an employee and not an independent contractor, the court looked at several factors and found that (a) the developer did more for the entrepreneurial enterprise than just work on the software, (b) the developer was paid a regular salary, although some of the compensation was in the form of stock, and (c) the developer’s work at the company was integral to the success of the business in general. The court considered the arguments made by the developer that the developer should have been treated as an independent contractor because (x) his hours were flexible,(y) the company did not exercise much control over the developer, and (z) the company failed to treat the developer as an employee when it came to forms and the payment of taxes. But again, the court gave the startup great latitude, and said that the company conducted its business more informally than an established business might have done, and the expectation for formalizing the employment relationship was not high.
In this case, the company was lucky, and the developer was left to negotiate for additional rights or additional compensation based on the software. But there is no need to leave the determination of ownership. Any software developer and company should reach a decision whether the developer is an independent contractor or an employee, and then appropriately document the relationship and the ownership. It should be clear what the intent of the parties is regarding ownership of software, and any other copyrighted works. In this case, the court stretched to find that the company owned the software, but another startup, or a more mature business might not be as fortunate.