Who owns your startup’s code before a business sale?

How a dispute over shares became a dispute over code

JustMed was developing a device to help people speak after removal of the larynx. Its key developer was also a shareholder and director. He worked from home, chose his own hours and was paid in shares. There was no written agreement about ownership of the software.

As the company prepared to meet a potential merger or acquisition partner, the developer became dissatisfied with his shareholding. He first changed the copyright notice in the code from the company’s name to his own. Two days before the meeting, he deleted the source from all JustMed computers. The court found that he intended to gain leverage in negotiations over his stake. 2010 opinion, PDF pages 4–7.

The appeal

United States Court of Appeals for the Ninth Circuit. 5 April 2010, No. 07-35861.

Law and issue

US copyright law: was the code created by an employee within the scope of employment? Separate claims arose under Idaho law.

On remand

United States District Court for the District of Idaho, 7 November 2012. Case No. 1:05-cv-00333-MHW, document 155.

Ownership, access and damages

Why the company owned the code

Under the US work made for hire rule, an employer is generally treated as the author and copyright owner of work created by an employee within the scope of employment, unless the parties agree otherwise in writing. The court therefore had to determine the developer’s status. A job title or payment in shares alone would not settle that question.

An indefinite relationship, continuing development of the core product, regular remuneration and additional duties, including website work and demonstrations, supported the company’s position. The court weighed those circumstances together and upheld employee status for copyright purposes. PDF pages 12–17.

Home working, control over hours and the absence of normal benefits supported the other view. The court cited cases in which the absence of benefits and tax withholding had weighed heavily in finding independent-contractor status. In JustMed, it took the startup’s informal operations into account, while expressly declining to excuse employment or tax violations. PDF pages 16–17. Without a written ownership agreement, the company had to establish its rights through a dispute about the developer’s status.

Why ownership did not secure a working product

The missing source was discovered during an attempted demonstration to the prospective buyer. The developer returned the code after a court order but removed some programmer’s comments. The team chose to rebuild from older versions. The 2012 decision records three months of work, the end of negotiations with Sweden’s ATOS and a distributor withdrawing from selling the product. PDF page 4.

For a prospective transaction, this calls for two separate checks. Counsel establishes which rights the company acquired. The technical team confirms it can retrieve the relevant version, build it and maintain the product without relying on one individual. A signed assignment does not perform the second check; repository access does not establish the first.

What the company could recover

The Ninth Circuit reversed the trade-secret misappropriation ruling. It sent the damages issue back to the district court for consideration under the remaining grounds. In 2012, that court preserved the total award: USD 41,250 for rebuilding the code, USD 5,000 in punitive damages and USD 2,283.14 in costs. The grounds were conversion (deleting the company’s software and retaining its hardware) and breach of the director’s fiduciary duty. PDF page 5: grounds of liability; pages 6–16: damages analysis.

The award did not include the value of a lost acquisition. The claim for interference with prospective economic advantage had been dismissed because the company had not established a valid economic expectancy. PDF page 1. For the company, ownership was confirmed, but the sale talks ended and the award came to about USD 48,500.

What to prepare before investment or a sale

The following is my practical analysis of JustMed, for founders, counsel and the technical lead to work through together. These are not requirements imposed by the court. Start with the product version being presented to the buyer or investor.

In the due diligence folder, connect each relevant module to its ownership evidence and confirmation that the company can access the required version. A folder containing every contract without that connection leaves the buyer to work out which document covers the critical code.

What to agree with a co-founder or developer

• Deliverables and rights. Identify existing code and future work, the recipient of rights, the transfer date and required signatures. Check for rights held by a previous employer or another customer.
• Payment and equity. Record compensation for the work and the terms of participation in the company. Shares alone do not replace an intellectual property agreement.
• Storage and handover. Specify where source, documentation and build settings are kept, who maintains backups and how completeness is checked.
• Departure and disputes. Agree delivery of work in progress, assistance for a replacement team and changes to access. Resolve these questions before a dispute over equity.
• Investor assurances. Match the IP warranties to the documents actually reviewed. Record open points in disclosures and an action plan for closing.

If a third party owns the code, another signature from the founder cannot solve the problem. Rights from the proper owner, an adequate licence or another solution will be needed, taking past use into account.

Does the conclusion apply to an international team?

JustMed concerns US copyright law and particular Idaho claims. For an international team, each contributor’s status and the rules governing ownership need separate consideration.

US contractors: the work made for hire label is not enough

For an independent contractor, the rule applies only within nine categories of commissioned works and requires a written agreement signed by the parties. Computer programs are not named as a separate category: eligibility depends on the particular work. 17 USC § 101. If the company needs copyright ownership, do not rely on the label alone: provide for a written assignment signed by the owner or their authorised agent under § 204(a).

England: being a director does not settle code ownership

English law has a similar starting point, but its own provisions must be considered. An employer generally owns copyright in work created by an employee in the course of employment, subject to an agreement to the contrary (CDPA section 11(2)). A copyright assignment requires writing signed by or on behalf of the assignor (section 90(3)).

Appointing a founder as a director does not itself establish employment. For section 11(2), the relevant relationship is employment under a contract of service, as defined in CDPA section 178. Establish the basis of ownership and, if the founder retains the rights, arrange a signed written assignment to the company.

For a distributed team, establish the contributors, countries, creation dates and applicable law first. The guide to contractor code ownership under English law covers assignment and licensing terms in more detail. This case note shows why that work belongs before acquisition talks.

Sources

• JustMed, Inc. v. Byce, 600 F.3d 1118 (9th Cir. 2010): facts on PDF pages 4–8; employee status on pages 12–17; trade secrets and remand on pages 18–23.
• District of Idaho decision of 7 November 2012, document 155: consequences on PDF page 4; damages on pages 6–16. Links use PDF page numbers, not the printed reporter pagination.
• US Copyright Act: § 101, §§ 201 and 204. CDPA: section 11, section 90 and section 178.

Sources checked on 28 October 2026.