Employer IP clauses and turning a side project into a company

Core idea#

If you work for a company, a government lab or a research institute (not a university, which playbook 2.01 covers), your employer may already own what you're planning to build. Employment contracts usually contain an invention assignment clause, and in some countries the law gives the employer ownership even without one. Founders who ignore this find out at the worst moment: in an investor's due diligence, or when their former employer's lawyer sends a letter.

The goal is simple: know exactly what your employer could claim, separate your project from your job, and leave with a clean, written position. Done early, this is usually straightforward. Done late, it can kill the company.

Three separate questions:

1. Ownership: does the employer own the invention, code or know-how?
2. Confidentiality: are you using the employer's confidential information or trade secrets?
3. Restrictions: do non-compete or non-solicitation clauses limit what you can do after leaving, and are they enforceable?

Who it's for: industry researchers and engineers, scientists at government labs and research institutes, and anyone building a side project while employed.

This is general information, not legal advice. Employment and IP law differ by country and, in the US, by state. Get advice on your own contract before acting.

How employer IP rights work#

United States: the contract decides, within state limits

• The contract is usually broad. Most employers use a proprietary information and invention assignment agreement (PIIA). Its assignment clause typically claims more than employees assume, and verbal assurances like "we'd never come after your side projects" don't limit a written clause (Promise Legal).
• Some states cap what employers can claim. At least nine states have statutes limiting invention assignment; California, Delaware, Illinois, Kansas, Minnesota, North Carolina and Washington have nearly identical requirements (Foley & Lardner), and New York has since added its own (Wilson Sonsini).
• The California test (Labor Code § 2870, the model for most): an employer can't claim an invention developed entirely on your own time, without its equipment, supplies, facilities or trade secrets, unless it relates to the employer's business or actual or anticipated R&D, or results from work you did for the employer. In practice, the exceptions mean the statute protects fewer side projects than people hope (Keker, Van Nest & Peters).
• Nevada and Utah differ: Nevada's statute makes patentable inventions presumptively the employer's (Foley & Lardner).

United Kingdom: the statute decides first#

• Section 39 of the Patents Act 1977 gives the employer an invention if it was made in the course of the employee's normal duties, or duties specifically assigned, where an invention might reasonably be expected to result; or if the employee has a special obligation to further the employer's interests (for example, a director). Otherwise, it belongs to the employee (Bird & Bird).
• Time and place aren't decisive. Work within your normal duties doesn't stop being so because you did it at home, out of hours, on your own equipment (HGF).
• Contracts can't take more. Section 42 makes contract terms unenforceable to the extent they reduce an employee's rights in inventions that section 39 gives to the employee (IPso Jure).
• Copyright and designs (for example, code) follow separate rules that are generally easier for employers to assert (DLA Piper).

India: largely contractual#

• There is no single statutory rule for employee inventions. Copyright in works made in the course of employment vests in the employer under the Copyright Act, subject to contrary agreement; for inventions, ownership is largely set by the employment contract, which makes the contract wording critical (Gratanet).
• Government labs and PSUs have their own rules on employee inventions and outside work; scientists at CSIR, DRDO or ISRO should also read playbook 2.15.

Auditing your position#

Step 1: Collect every document you signed#

Offer letter, employment contract, invention assignment or PIIA agreement, confidentiality agreement, employee handbook, IT and acceptable-use policy, equity agreements (some include IP terms), and any agreement you signed when you joined a specific project or programme. Many people discover a second IP agreement signed on day one that they'd forgotten.

Step 2: Answer six questions honestly#

Step 3: Map what's clean and what isn't#

Split the project into components (core idea, code, data, designs, know-how). For each, write where and when it was created and with what resources. Clean components are ones created entirely on your own time, with your own resources, outside your employer's field.

Step 4: Decide your route#

• Clearly clean: keep it that way. Stop any overlap now; keep records.
• Arguable: ask for a written release or waiver (section below) before you raise money. Clearly the employer's: negotiate a licence or assignment, or start again from a different approach, documented as independent.

Step 5: Keep evidence from now on#

Use personal devices and accounts; keep dated notes (a lab notebook, git history) showing what you did and when; don't email project files to or from work accounts.

Worked example (illustrative)#

Neha is a battery engineer at a large automotive supplier in Pune. On weekends she has developed a new electrolyte additive on her own equipment, using published literature.

• Relates to employer's business? Yes: her employer sells battery packs, and its R&D roadmap includes electrolytes. Red flag.
• Own time and equipment? Yes, but she once ran a test on the company's cycler. Red flag.
• Contract: assigns "all inventions relating to the company's business, whether or not made during working hours".

Her position is weak, even though Indian law doesn't enforce post-employment noncompetes. She asks her manager and the legal team for a written waiver, offering the company a right of first negotiation for a licence. After two months, the company agrees to waive its claim in exchange for a small royalty on any automotive sales. With the waiver in place, investors' due diligence is clean.

Leaving cleanly#

Ways to clear an employer's claim#

Put the release in writing, describe the project specifically, and have it signed by someone with authority. An email from your manager is not enough.

Non-competes and non-solicits#

• India: post-employment non-competes are void under Section 27 of the Indian Contract Act; the Delhi High Court reaffirmed this in 2025 (JSA). Restrictions during employment, non-solicitation of customers and employees, and confidentiality obligations can still be enforced (India Law Offices). Notice periods (often long) are enforceable as part of employment.
• United States: non-competes are governed by state law. California bans most of them; other states allow "reasonable" ones. Check your state's law and your contract. Trade-secret law applies everywhere.
• United Kingdom: post-employment restrictive covenants are enforceable if they protect a legitimate business interest and go no further than reasonably necessary; courts often uphold non-competes of a few months. The government has consulted on reform; check the current position.

Non-solicitation clauses matter for founders: you may be barred from recruiting former colleagues for a period. Plan hiring accordingly.

Practical steps before you resign#

1. Finish the audit and get any release signed before you resign, while you still have goodwill.
2. Return all employer property and delete employer files from personal devices; keep a record that you did.
3. Don't take customer lists, code, data or documents.
4. In an exit interview, describe the company you're starting accurately, without revealing your plans in detail.
5. Don't recruit colleagues until you've checked the non-solicit.
6. Tell your future investors and lawyers what you've done; it's better they hear it from you.

Scripts#

Asking for a written release#

"I've been working on a personal project, [short description], on my own time and with my own equipment. I'm considering turning it into a company. I don't believe it relates to [employer]'s business, but I want to be completely transparent. Would the company confirm in writing that it doesn't claim rights in it? I've attached a one-page description of what it is and isn't."

When the project is close to the employer's business#

"I recognise this is close to our [area]. Rather than leave any uncertainty, I'd like to propose terms: the company would license or assign its rights to my new company in return for [a royalty / equity / a right of first negotiation]. I'd rather agree this now than create a problem later."

Telling investors#

"I developed the core idea while employed at [employer]. We audited the position with a lawyer: [summary]. [Employer] signed a release on [date], which is in the data room."

Common mistakes#

• Assuming "my own time" is enough. In most places, the link to the employer's business matters more.
• Using one company laptop or cloud account. It can taint the whole project. Relying on a verbal OK. Get it signed by someone with authority.
• Resigning first, asking later. Goodwill disappears on resignation day. Taking files "just in case". That turns an IP question into a trade-secret claim. Recruiting colleagues too early. Check non-solicits.
• Hiding the history from investors. It will come out in diligence.

Related playbooks#

• 1.03 Leave, sabbatical or dual role (for academics)
• 2.01 Who owns your invention? (universities)
• 2.15 Licensing from government labs
• 2.17 Rights to research data
• 2.18 Trade secrets vs patents

Sources#

• Promise Legal, Invention assignment clauses: what they actually claim.
• Foley & Lardner, Invention assignment agreements: how to avoid pitfalls and state variants; Wilson Sonsini, New York invention assignment law; Keker, Van Nest & Peters, on Labor Code § 2870.
• Bird & Bird, UK employee invention laws; UK IPO, Manual of Patent Practice, section 39; HGF, on employee inventions; DLA Piper, employee-generated IP.
• Gratanet, Service-related works and inventions in India; JSA, Delhi High Court on non- competes, July 2025; India Law Offices, post-termination restrictive covenants.

Worked example is illustrative. Not legal advice. Last checked November 2026.