I start this by stating my assumption that a fair amount of people coming into the cannabis space don’t have MBA’s, or a background in venture financing or raising funds from angel investors. They have a great idea, or a great product or service, or some awesome software, and they may have run brick and mortar or online businesses in the past.
They understand the basics of doing business in their state, but they don’t start with an awareness of intellectual property and how important it can be to secure your company’s rights to that IP in the early stages. If you are an expert on IP, then don’t bother reading the rest of this, unless it’s to look for things to correct. I welcome such comments, as I am by no means an expert and nobody should take anything I say here as legal advice.
What is Intellectual Property?
Because Intellectual Property refers to products of human creativity and intelligence, it is intangible. This makes it a squidgy concept for some people to wrap their heads around. Basically, for our purposes, it covers inventions, patents, and copyrights. This includes artwork, writings, software, music, logos, trademarks, trade secrets, live and recorded performances, and other commercially exploitable creations of the mind.
You might think that you don’t need to know about this stuff, because your company is not a media or a software company. You haven’t invented anything. You produce edibles, or you extract oil, or your company provides a delivery service. Why should you bother learning about IP and how to protect it?
The (Hypothetical) Intellectual Property of a Toffee Recipe
Say you have an edibles company that produces toffee. One day, because your supplier didn’t deliver on time, and you have a contract to deliver product to dispensaries by a certain date, your employee is forced to use different ingredients. Because this employee has a culinary background, they brilliantly change the recipe to accommodate the shortage. The new version becomes such a huge hit that it turns into your number one seller. Your company becomes so big that you now need to raise capital to expand your production facilities. Or you get a buy-out offer that makes your head swim. Great! Only, it’s not.
Unless you have an IP assignment agreement in place with the employee who created that hot new toffee recipe, you are in a very sticky situation, no pun intended. Investors want a very clear chain of ownership to any important intellectual property. So clear, in fact, that as part of their due diligence, they not only require signed IP assignments from employees, but from founders, too. They want their money invested in a company that controls its own destiny, not one beholden to the creative control of the individuals who make up that company. This goes even more for potential acquirers, because they are literally paying to own the intangibles you bring to the table.
If you didn’t get the IP assignment signed up front when you hired that employee, you are now in the unenviable position of negotiating for it when that employee now has a very good idea what that recipe (aka ‘invention’) is worth. If your employee decides to be difficult, your hands may be tied. Even if you own your own recipes, the one that employee created, the same one that your potential investors are most excited about, can’t be part of the deal.
Similar situations can arise if employees (or founders) create logos, invent methods and processes, compose slogans and jingles, or contribute anything that becomes part of your company’s corporate image or commercial success. You may get your funding, or get your company sold, but it will likely cost you far, far, more in terms of time, money and aggravation than it would have if you had simply gotten an IP assignment signed at the moment of hire for that employee, or at the time you form your company, if you are a founder.
A little foresight goes a long, long way.