Software development in startups: It all depends on the right rights

When startups develop new software for their business models, the question of whether the startup has sufficient rights to the software is often neglected. Our guest author explains what to watch out for.

Technological progress is lived in most startups. Many startups are developing new software to advance their innovative business models. When developing software, the founders and developers often focus on innovation, quality standards or possible cost optimization. However, the question of who has the rights to the software and how the startup gets these rights to the software is often neglected. It is not enough to own the developed software or the code. Rather, the startup must have sufficient rights to commercialize the software.

This problem may depend young growth companies have to do with the fact that the legal classification of software rights is not that easy. According to German law, software can in particular be protected under copyright law. In individual cases, patent protection may also be applicable. There is also the option of protection as a trade secret. The most important application is copyright. According to this, software is protected if it is the result of the own intellectual creation of its author. This means that the rights to the software initially belong to the developer as the author. The author can only be a natural person. The assignment of rights to software therefore depends on who developed the software.

Startups often develop software themselves. This can be done by employees or the founders themselves. With regard to salaried employees, the rights situation is regularly easy to assess. The start-up as employer is then generally entitled to exercise all property rights on the software, unless otherwise agreed with the employee. The only requirement is that the employee has created the software “in the performance of his tasks or according to the instructions of his employer”. The status of the employee is given if there is an employment relationship with the employee and who carries out an activity that is dependent on the startup and bound by instructions.

In individual cases the software development can also be done by the founders themselves. They are regularly shareholders in the start-up and therefore not employees. However, this case is often unproblematic, for example if the founders subsequently grant the startup the necessary rights.

If a startup lacks the necessary skills, external companies or freelancers are used for software development. When commissioning them, it is not always considered that the rights situation must be contractually agreed. If the startup uses an external company or a freelancer for software development, the company does not automatically have property rights over the software. An agreement on rights is required. In this context you have to know that in case of doubt the author grants usage rights (only) to the extent that the purpose of the contract absolutely requires (rule of transfer of purpose). Often the missing or unclear agreement about the rights is noticed much too late.

Typical example: A software-based startup is to be sold or at some point is looking for an investor. The potential buyer or investor then usually carries out due diligence. This is understood to mean the careful examination of a company, particularly with regard to its economic, legal, tax and financial circumstances. During the legal examination of the startup, however, the potential buyer or investor notices that it is unclear to whom the rights to the essential software belong. In the worst case, this can be a reason why the deal does not go through.

In extreme cases it is even unclear who developed the software or the legally protected parts of the software. This can easily happen, for example, when several people are involved or as part of agile software development. It is often impossible or disproportionately expensive to find out who is the author of the software and to whom the startup has to contact regarding the granting of rights to the software. Another very important aspect is often not known: rights of use to software cannot be acquired in good faith.

If the rights to the software are missing and if this software is part of the commercial business model, there are liability and failure risks. For example, a developer can subsequently assert the rights to the software and thus also (high) license fees. It may also be that the use of the software is prohibited by a court.