Anyone who’s seen the film The Social Network knows the dangers of bringing in outside help to build your world-changing business idea.
The film is largely based on the claim by the Winklevoss twins that Mark Zuckerberg stole their idea for Facebook after they brought him in to help with coding the social networking site.
While the claim’s veracity has been debated, the reality is that the issue is becoming an increasing problem in the startup and small business community as entrepreneurs turn to online outsourcing to access quality services at affordable rates.
World Economic Forum ICT specialist Elena Kvochko predicts that over the next four years, online outsourcing will grow by more than five times, becoming a $5 billion industry by 2018.
Many businesses enabling this growth by allowing businesses to outsource everything from software coding to logo design. With the outcome of improved efficiencies and large cost savings, it is no wonder this is a popular route.
However, all too often little attention is given to the legal precautions necessary to insulate the business from intellectual property dramas. Without proper legal agreements in place, questions of ownership and misuse can arise. While these outsourcing sites protect IP to a certain level, we recommend taking additional steps to protect yourself.
Once you form an entity, the company doesn’t own the IP until it is assigned to the company. Without the proper assignment of IP, large risks begin to emerge.
Some outsourcing nightmares include:
1. Claim for future profits
When outsourcing the design and development of a website app for example, it is efficient and effective to hire someone offshore. Often entering such agreements can lead to lucrative results with the product being valued at millions of dollars. However without the proper assignment of intellectual property, the developer might have a claim for future profits because they developed the code for the app. Not a very profitable outcome.
2. Reducing your competitive advantage
The last thing you want to do when outsourcing is pay a developer to design your application and then find out the developer is re-using the application over and over again with other businesses, perhaps even your largest competitor. Without an assignment of IP, the developer has a right to do this, and consequently your own idea could potentially hurt your competitive advantage in the marketplace.
3. Downstream risks – turning off potential investors
Finally, following the development of a brilliant idea and product, there comes a time when you will want to raise capital or investors will look to invest in the business. The first thing the investor will ask is if you own the intellectual property. An investor will not advance an idea that a business doesn’t have the legal right to.
So before joining forces with an outsourcer it is important to protect yourself from the potential legal rabbit hole. There are four easy steps to follow:
Step 1 – Check terms of service
Step 2 – Assign intellectual property
The most important issue to address is assignment of IP. It is important that any work created or completed by the contractor is assigned to you. Under Australian law, Intellectual Property is only legally assigned by a written and signed document. Section 196(3) of the Copyright Act 1968 (Cth) requires there to be a signature on the written assignment document. Therefore, an email exchange or simple “standard form” contract wouldn’t be of any use unless the document is signed. It is often the case that transactions conducted through third party providers do not have a written and signed agreement to assign the IP.
Step 3 – Understand who is the creator of the work
Make sure the person assigning the intellectual property is the person that created it. Occasionally the party who is purporting to assign the copyright doesn’t actually own it in the first place. This can occur when clients use marketing agencies, which often sub-contract work to freelancers. If a freelance illustrator has been engaged by a marketing agency to develop designs for a new brand, then it may be that the illustrator owns the copyright in the designs and not the agency. A written assignment signed on behalf of the marketing agency will not be effective to transfer the copyright.
Step 4 – Keep in mind weak enforcement rules
Acknowledge that disputes over intellectual property are almost impossible to enforce when the contracted party is based overseas. There is a trade-off between cheaper outsourced labour and the legal protection afforded when you employ someone in the same legal jurisdiction. There are no legal agreements that will offer complete protection across two jurisdictions (countries) however you will be protected locally ensuring they can not start a competitive local clone.
While online platforms have streamlined the process of outsourcing and do protect IP to a certain degree, there are a few additional steps to make sure your business is properly protected. LawPath, an online legal business can provide simple forms that will protect your business form outsourcing nightmares.
As online job marketplaces grow, there is an opportunity to build more flexible and efficient businesses. Just make sure you’ve got solid legal protections in place so you don’t wind up with a billion-dollar missed opportunity like the Winklevoss twins.