Hired a freelance developer to build core features of my SaaS. Paid him $25K over 6 months. Used a basic contract I found online. Now raising a seed round and during legal diligence, discovered the contract didn't have proper IP assignment language. Developer is now asking for 5% equity to sign an assignment.
I feel held hostage. What are my actual options here?
Unfortunately this is common. Under US copyright law, work created by independent contractors is NOT automatically "work for hire" unless (1) the contract explicitly says so AND (2) it falls into specific categories (software doesn't qualify).
Your options:
1. Negotiate with developer (sounds like he's doing this)
2. Argue implied license to use the code (weak, doesn't give you ownership)
3. Rewrite the code (expensive, time-consuming)
4. Walk away from the raise
5% equity for $25K of work? That's insane. He built features, not the whole company. I'd counter with a one-time payment bonus of $5-10K for signing the assignment. If he refuses, consider rewriting.
devil's advocate: if you're raising at a $5M valuation, 5% = $250K. for code that's core to your product and took 6 months to build, that's not crazy. he has leverage and he's using it. that's business
The thing is, I gave him specs, managed the project, and he was just executing. He wrote maybe 15K lines of code. Feels wrong that a contractor can hold a company hostage like this.
The law doesn't care about "feels." It's black and white: without an assignment clause, the contractor owns the copyright to code they write. This is why every serious startup uses proper contractor agreements with IP assignment + work-for-hire language.
Practical advice: negotiate. Maybe 1% equity with 4-year vesting, or $15-20K cash. Something in between. Get it done before the raise falls apart.
How long would it take to rewrite the code? If it's 2-3 months and you're early stage, might be worth it. You'd own it clean, learn the codebase better, probably improve it. 5% equity is a lot to give up forever.
UPDATE: Negotiated to $18K cash + 0.5% equity with 2-year cliff. He signed the assignment. Expensive lesson but at least it's done. Using a real contractor agreement going forward.
That's a reasonable resolution. $18K + 0.5% is way better than 5%. Glad you got it sorted. PSA to everyone: use proper contractor agreements from day one. The $500 you spend on a lawyer is cheaper than this.
Reviving this thread because I'm in a similar situation. Hired an agency (not individual contractor) to build our mobile app. Contract had IP assignment language but the agency subcontracted to offshore devs without telling us. Now the agency says they can't guarantee the subcontractors will sign assignments.
Agency is pointing to a clause in our contract that allowed them to use "third party resources" — does that screw us?
This is why well-drafted agreements include a "flow-down" clause requiring the contractor to obtain IP assignments from any subcontractors. Without that, you have a chain-of-title problem.
Your options: (1) Require the agency to obtain assignments from their subs as a condition of final payment, (2) Have agency indemnify you against IP claims from subs, (3) Get assignments directly from the offshore devs (agency should facilitate).
The "third party resources" clause likely allowed subcontracting but didn't address IP ownership. Two different issues. You may still have recourse against the agency for breach of the IP assignment covenant.
Just went through M&A due diligence and this exact issue killed a deal for a company I know. Acquirer found that 3 contractors from 2019 never signed IP assignments. Two couldn't be located, one wanted $200K to sign. Acquirer walked.
The fix: We now require IP assignments BEFORE any code is written, not after. And we do quarterly audits of our contractor paperwork. Pain in the ass but worth it.
Update on my situation: Agency finally got 2 of the 3 offshore devs to sign assignments. Third dev is MIA — apparently left the agency months ago and they don't have current contact info. We're withholding final $15K payment until resolved. Agency is now threatening to sue us for non-payment.
Lawyer says we have a strong position since they breached first by not securing IP rights. Hoping they back down. What a mess.
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