Recoupling Founders with Their IP Improving Innovation by Rationalizing IRC Section 351 (Licensing vs. Assignment of Founderss IP in VC Backed Start-Ups)

Abstract

This Article questions the conventional wisdom of the U.S. practice of early assignment of founder’s intellectual property to the venture capital backed startup-company. The Article shows that certain U.S. tax rules motivate founders to rush to assign their individually owned intellectual property to the startup-company rather than license it to the company. This tax enhanced distortion of the founders’ choice may have socially inefficient effects that under certain circumstances hinder innovation by decoupling the intellectual property from those who are most apt to exploit it. Thus, this Article offers for consideration, proposals to reform the current tax treatment of intellectual property transfers. The proposed reform will level the playing field from a tax perspective and prevent distorting the founders’ choice between intellectual property assignment and intellectual property licensing.