Who owns the code? Contractor agreements every startup should check

Early-stage companies build a lot with contractors: the first version of the app, the brand, the data pipeline. Then a diligence checklist arrives with a question every investor and acquirer asks: does the company own its code?

The answer is often less certain than founders expect, because of three words in a lot of contractor agreements.

"Work made for hire" usually isn't enough for software

Under the U.S. Copyright Act, a work made for hire is owned by the company from the start. For employees, that's straightforward: work created within the scope of the job belongs to the employer.

For contractors, it's narrower. A commissioned work is a work made for hire only if both sides agree in a signed writing and the work fits one of nine categories in 17 U.S.C. section 101: a contribution to a collective work, part of a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test, or an atlas.

Custom software, a logo or a backend usually doesn't fit neatly into that list. If the agreement relies on "work made for hire" alone, the contractor may still own the copyright.

The fix: an assignment

A good contractor agreement does two things:

1. Says the work is a work made for hire to the extent the law allows, and
2. Assigns to the company all rights the contractor has in the work, including copyright and inventions, with a promise to sign any further papers needed.

The assignment is what does the heavy lifting.

The California wrinkle

California adds a twist. Under Labor Code section 3351.5(c), a person engaged to create a specially commissioned work is treated as an employee for workers' compensation purposes when the parties sign a work-made-for-hire agreement and the company obtains ownership of the copyright. Other California rules can follow from that.

That's one reason many California companies lean on an assignment rather than "work made for hire" wording for contractors. It's a question to settle with counsel when you set up your template, not after.

Other clauses to check

• Pre-existing materials. Contractors often reuse their own code libraries. The agreement should give you a perpetual license to anything of theirs built into your product.
• Open source. Ask for a list of open-source components and their licenses, and a promise not to include anything that would require you to publish your own code.
• Confidentiality. Covers your code, data and plans, during and after the engagement.
• Moral rights and attribution. Waived to the extent the law allows, so you can change the work freely.
• Payment isn't a condition of the assignment. Some contractor forms say rights pass only on full payment. If there's a fee dispute later, you don't want ownership in limbo.

Already worked with contractors on loose terms?

It's usually fixable. A short confirmatory assignment, signed now, covering past work, closes most gaps. It's far easier to get while the relationship is good than during a financing.