You might have missed this, but over the last few days Ebay found a buyer for most of Skype.  The Skype story has many threads that resonate with issues such as the success of peer-to-peer data networks, the affect of true price competition on the incumbent telecommunications companies and what happens when a company buys a business that is outside of its core competency.  Skype has been important bell weather in all of these ways, but the part that has struck me the most is how it shows the importance of knowing where the core intellectual property rights are before you buy or invest in the business.

Today’s NY Times has an article about the Skype acquisition that addresses this issue really well. For those of you who don’t want to read the article, the salient point is that when Ebay purchased Skype it did not acquire the absolute ownership of some aspects of the core intellectual property rights for the business.  These rights remained with the founders, who then licensed the technology to Ebay.  This worked fine for a while, until the founders left the company.  And, then, things got contentious.  Ebay couldn’t benefit from the business purchase they thought that they had made, and ultimately had to sell the business.

What interests me here is that the Skype story demonstrates an important point about the relationship between intellectual property rights and a business.  There is a tendency for people to assume that intellectual property invented by an employee or founder automatically is the property of the company.  In fact, that is often not the case.  Invention, the creation of intellectual property, is as a matter of law done by individuals not corporations.  Therefore, the individual inventors are the owners of the intellectual property, not the entities that they own or the entities that they work for.

This separation of invention and corporate ownership results in some very difficult moments for the unprepared.  Most of the time, I’ve seen it in the context of a venture investment, where the investor wants to invest in an entity that owns all of the required intellectual property to pursue the business.  I have also seen a few times where a business sale was thwarted because intellectual property rights were not clearly held by the business.  The Skype example is much larger in dollar numbers, but holds the same lesson.

Where an entity is intended to be the vehicle of wealth creation – i.e., the inventor does not merely plan to license his intellectual property to another – the vehicle must have all of the inventor’s intellectual property rights.  Failure for this to occur creates leverage for the inventor down stream, either in the ability to block a transaction, or the ability to get compensated directly.  As I am sure you can imagine the people who invest in entities tend to look pretty dimly at inventors retaining individual economic rights.

This plays out in customary practice in a number of ways.  Businesses put in place various legal agreements to force their employees and consultants to automatically transfer their intellectual property rights to the business.  These “Proprietary Rights and Invention Assignment Agreements” are the staple of every venture capital deal, and in my experience in place with every well-run technology business, whether it is venture backed or not.  Similarly, businesses put in place confidentiality agreements to protect their trade secrets (including secrets “invented” by the individual employee).  Sometimes applicable state laws will impose a transfer of rights even if a business neglects to put in place written agreements. 

From the inventor’s perspective, this might seem unfair – why should an employer get an irrevocable blanket right to intellectual property developed by the inventor or consulting client?  However, as a matter of commercial practice, I think it is both reasonable and fair for an business that is providing employment or other economic benefit to receive the intellectual property it paid to develop.  But, whether it’s fair or not, it’s customary commercial practice and inventors should not be surprised by this.

Where inventors can make some headway is to limit the scope of the intellectual property rights automatically transferred. The most customary exceptions are for intellectual property clearly invented outside of the employment relationship, or for intellectual property that existed prior to the individual becoming part of the employer’s business.  These limitations are particularly important where an inventor is working as a consultant, or has had a long career as an inventor. 

The expectation of any inventor founder of an emerging company should be that the investors will require automatic transfer of all intellectual property.  This is the general rule, because the investor will not want to have the ultimate value of its investment subject to down stream actions by the inventor.

That Ebay apparently broke this customary practice when it purchased Skype suggests that either (i) it ignored this basic rule or (ii) the Skype founders had sufficient negotiating leverage to overcome a standard condition to a transaction.  Whatever the reason, the failure to unify ownership of the business and ownership of core intellectual property rights appears to have cost Ebay money and time.  Depending upon how you look at it, the Ebay/Skype story is either a cautionary tale for investors and acquirers or a story that shows how founders can retain control over their business ideas.  But, with the amount of capital involved and its publicity, you can assume that anyone investing in technology in the near term will be even more focused on capturing intellectual property rights, particularly from founders.