Many startup companies begin the same way — a founder identifies a problem, starts working on a solution, and builds momentum before ever leaving their day job. It’s a practical approach, and for many founders it’s the only viable path. But working on a startup while employed by someone else creates legal risks that aren’t always obvious and can have serious consequences if they aren’t addressed early.
The core issue is intellectual property ownership. Depending on what you signed when you were hired, where you did your work, and what your startup does, your employer may have a legitimate claim to IP you created while you were on their payroll. That claim — if it exists and goes unresolved — can surface during investor diligence, complicate a financing, or in serious cases, threaten the foundation of the business itself.
What Employment Agreements Actually Say About IP
Most employees sign some form of IP agreement at onboarding — sometimes a standalone document, sometimes buried in an offer letter or handbook. Two provisions matter most for founders.
An invention assignment clause is a contractual provision requiring employees to assign ownership of inventions they create during employment to their employer. The scope varies significantly — some clauses cover only work done using company resources or during work hours, while others purport to cover anything created during employment that relates to the company’s business, regardless of when or where the work was done.
A non-compete or non-solicitation clause may restrict what work you can do during or after employment — potentially including building a company in a related space. Enforceability varies widely by state, but these clauses deserve careful review before assuming they don’t apply.
If you signed an employment agreement and haven’t read it carefully since, now is the time. The difference between a narrow and broad invention assignment clause can determine whether your employer has any claim to what you’ve built.
The Key Risk Factors
Not every founder who worked on a startup while employed has a problem. The risk depends on a combination of factors that, taken together, determine how much exposure exists.
Relatedness to Your Employer’s Business
The closer your startup is to what your employer does, the stronger the potential claim. A software engineer at a fintech company building a consumer app in an unrelated space faces different risk than one building a competing product. This is one of the more consequential factors and one founders sometimes underestimate.
Use of Employer Resources
Working on your startup using your employer’s equipment, network, or systems significantly increases risk. Many invention assignment clauses specifically cover work done using company resources, regardless of subject matter. Even occasional use — a few hours on a work laptop — can create exposure.
Work Hours
Some agreements cover IP created during work hours, full stop. If you were developing your startup concept, writing code, or creating materials during your regular working hours, that history matters.
State Law Protections
Several states have statutes that limit how broadly employers can claim ownership over employee inventions. The most commonly cited are California (Cal. Lab. Code Section 2870), Delaware (Del. Code tit. 19, Section 805), Minnesota (Minn. Stat. Section 181.78), and Washington (RCW 49.44.140). Illinois (765 ILCS 1060/2), North Carolina (N.C. Gen. Stat. Section 66-57.1), and Utah (Utah Code Section 34-39-3) have comparable protections.
These statutes generally protect inventions that are developed entirely on the employee’s own time, without using the employer’s equipment, supplies, facilities, or trade secret information, and that don’t relate to the employer’s business or actual or demonstrably anticipated research or development, and don’t result from the employee’s work for the employer. If you’re in one of these states, those protections may limit your employer’s claim — but they don’t eliminate it, and the specific facts still matter.
What Founders Who Have Already Left Should Consider
If you’ve already left your prior employer and are now building full-time, the question is whether anything you created while still employed could be subject to a claim. This isn’t just a theoretical concern — it’s one that investors will ask about during diligence, particularly if your company is building in a space that overlaps with a former employer.
The analysis turns on the same factors above: what your agreement said, what you worked on while employed and when, and what your startup does relative to what your former employer does. If there’s meaningful overlap, it’s worth getting a legal assessment before you’re in the middle of a raise and the question comes up at the worst possible time.
Unresolved IP ownership questions are among the more serious issues an investor can find in diligence. They go directly to whether the company actually owns what it’s built — which is foundational to any investment thesis.
Practical Steps to Reduce Risk
For founders still employed elsewhere, a few steps can meaningfully reduce exposure: do startup work on personal devices and accounts, keep work clearly separated in time and tools, understand what your employment agreement actually says, and get a legal assessment if your startup is in a space related to your employer’s business.
For founders who have already left, the equivalent step is an honest assessment of what was created when and under what circumstances. If there’s genuine exposure, understanding it early gives you options. Discovering it mid-diligence does not.
If you’re navigating questions about IP ownership from prior employment, we’re glad to help you work through the specific facts and understand where you stand.
Frequently Asked Questions
Can my employer claim ownership of my startup idea if I developed it while employed?
Yes, in many cases. Whether your employer has a valid claim depends on what your employment agreement says, what you built, and how you built it. Broad invention assignment clauses can cover IP created during employment that relates to the employer’s business, even if the work was done on personal time. The specific language of your agreement and the facts of your situation determine the actual risk.
What is an invention assignment clause?
An invention assignment clause is a contractual provision in an employment agreement that requires employees to assign ownership of inventions they create during employment to their employer. The scope varies — some clauses are narrow, covering only work done using company resources, while others are broad enough to cover anything related to the employer’s business regardless of when or where it was created.
Does working on my startup on personal time and personal devices protect me?
It reduces risk significantly, but does not eliminate it. Personal time and personal devices provide the strongest protection when combined with unrelated subject matter — particularly in states with statutory protections like California (Cal. Lab. Code Section 2870) and Washington (RCW 49.44.140). However, if your startup is in a space related to your employer’s business, personal time and devices alone may not be sufficient.
Which states have laws protecting employee inventions?
California (Cal. Lab. Code Section 2870), Delaware (Del. Code tit. 19, Section 805), Minnesota (Minn. Stat. Section 181.78), Washington (RCW 49.44.140), Illinois (765 ILCS 1060/2), North Carolina (N.C. Gen. Stat. Section 66-57.1), and Utah (Utah Code Section 34-39-3) all have statutes limiting employer claims over employee inventions. These protections generally apply to inventions developed on personal time, without employer equipment, supplies, facilities, or trade secret information, and unrelated to the employer’s business or anticipated R&D. The specific conditions vary by state.
When does IP ownership from prior employment become a problem for investors?
It becomes a problem during due diligence. Investors and their counsel review the company’s IP ownership as a standard part of any financing. If there’s a credible claim that a former employer owns IP that’s central to the business, investors will flag it — and in some cases won’t proceed until it’s resolved. It’s one of the more serious diligence issues precisely because it goes to whether the company owns what it’s built.
What should I do if I think my prior employer might have a claim?
Get a legal assessment before you’re in the middle of a financing. The facts matter — what your agreement said, what you created and when, and how closely your startup relates to your former employer’s business. Understanding your exposure early gives you options for resolution, including negotiation with the former employer, a formal release, or restructuring what you’ve built. Discovering it mid-diligence limits your options significantly.
