You can build the world's best product, but if the IP and founder stakes aren't locked down before the company takes off, one departing co-founder or a sloppy contract can walk away with the engine of your business. The fix is mostly paperwork + smart process — done early and cleanly.
What's Happening
Founders form an LLC quickly (or retro-fit one later) but skip the essential legal plumbing that makes the company the owner of the product, the brand, and the key know-how.
Why It's a Challenge
IP created before or outside the company often remains in a founder's name unless there's a clear assignment. Without assignment, a founder who leaves may retain rights, creating risk to valuation, investment, and enforceability.
Who Is This For
This guide is for founders and early-stage operators forming an LLC (or converting to one) who want a clear, practical checklist to protect IP and make sure ownership, incentives, and exit mechanics are investor-ready.
The Checklist - Concrete Steps to Protect Founders & IP
Step 0 — Do this before or immediately when forming the LLC
Run an IP inventory: list code, designs, trade secrets, domain names, trademarks, provisional patent ideas, and third-party code.
Do a pre-formation clean sweep: get all founders/employees/contractors to sign assignment + NDA templates that clearly assign company-related inventions and works to the business.
Step 1 — Founders' Agreement + Vesting
Put a written founders' agreement in place (roles, equity splits, vesting schedules, cliffs, buyback rights for departures). Vesting avoids "dead equity" and aligns incentives.
Step 2 — IP Assignment Agreements
For any IP created before the LLC exists (or by a founder personally), execute a signed assignment that transfers ownership to the LLC. This is critical — without an assignment, the IP may remain the founder's personal property.
Step 3 — Employee & Contractor Contracts with IP Clauses
Use employment agreements and contractor agreements that include clear "works made for hire" or assignment language and require disclosure of pre-existing inventions. Include NDAs for confidential information and trade secrets.
Step 4 — Operating Agreement — put IP clauses in it
Include express provisions that:
- Require members to assign relevant IP to the company
- Grant the company rights to use member-contributed IP
- Set rules for IP commercialization and revenue splits if members retain residual rights
Step 5 — Record & Register Where Appropriate
For trademarks: file at the USPTO (federal registration gives nationwide protection and stronger enforcement).
For patents: if you have patentable inventions, consider provisional filings and assign patent rights to the LLC; record assignments with the USPTO.
Step 6 — Trade Secret Hygiene
Limit access, label confidential materials, implement role-based access, and document processes. This operational work often matters more than formal filings for trade secrets.
Step 7 — Funding & Exit Readiness
Keep a clean paper trail: executed assignments, up-to-date filings, employee IP consents, and a tidy cap table. Investors will do IP diligence; missing assignments or unclear ownership is a deal killer.
Case Study
An early hardware LLC launched using code and prototype designs written by a co-founder before the company existed. They formed the LLC but delayed executing assignment paperwork. Six months later, the co-founder left and asserted personal ownership of key IP. After months of negotiation the company paid to license the designs back — a costly and avoidable outcome. A clean assignment when the LLC formed would have avoided the conflict and preserved the company's negotiating leverage.
Practical Takeaways
- Do a formal IP inventory before scaling or fundraising.
- Execute written IP assignment agreements for any pre-formation work. (Don't rely on informal emails.)
- Put founders' agreements and vesting in place to avoid dead equity and incentivize commitment.
- Put strong assignment + confidentiality language in employment and contractor contracts.
- Register trademarks and patent rights in the company's name and record assignments with the relevant offices.
Disclaimer: This article provides general information about business structures and is not tax, legal, or accounting advice. Rules and tax treatments change across jurisdictions and over time. Consult a qualified attorney and CPA for advice tailored to your specific situation.