Protecting Your Startup’s IP: Building a Chain of Title from Day One

A chain of title is a record which shows all the transfers and the history of ownership and right holding in relation to the intellectual property, starting from the initial owner to the actual owner or right holder.

The reason it is called a chain of title is that all transactions in relation to the ownership and right holding must follow each other closely, and there shall not be any gap between them, just like a chain. A potential investor would rightfully expect that there must be no question mark with respect to intellectual property rights attached to the target startup’s technology and would require to see a satisfactory chain of title at the due diligence phase.

How to establish a chain of title?

The owner of the intellectual property can be one of the founders of the startup, an employee, or third party contractors. For example, computer software is a product that is consistently developing; therefore, it is very common to have different persons making different parts of it.

According to Turkish law, the owner of an intellectual property is the real person who made the “work”, and this title does not automatically pass to the employer or the person who ordered the work.

The best way to establish a complete chain of title is to make all transactions in writing and document them. Written and signed agreements are also a requirement under the Intellectual Property Law No. 5846 (known as “FSEK”) to transfer financial rights attached to an intellectual property.

Work made for hire

The person who ordered a work, to benefit from all the financial rights in addition to the usage right, must acquire these rights from the owner through a written agreement. Therefore, the agreement must set out that the financial rights will be transferred to the ordering entity once the work is completed.

Work made by employees

There is an exception for the works made by employees. According to FSEK, considering the nature of the work and the aim of the employment contract, employers are entitled to use the financial rights related to the work created by employees, if:

• - The work was created within the scope of the employment agreement,

• - There is no agreement stating that the financial rights will remain with the employee, and

• - The nature of the work does not suggest otherwise.

To avoid potential disputes in the future, it is recommended to include an express provision in the employment agreement stating that the financial rights will be transferred to the employer.

It might be practically difficult to conclude agreements with the right holders retrospectively. Therefore, from day one, the ownership of the work must be clearly determined, and each transaction must be properly documented in a timely manner.

Approval of the work owner regarding transfers to third parties

There is a crucial point that must not to be overlooked in order to establish a strong and valid chain of title. The person who has acquired the financial rights from the original owner of the work may transfer these rights to a third party only with the approval of the initial owner. It is possible - and recommended - to include this approval in advance in the first transfer agreement. Otherwise, any subsequent transfer will be invalid.