How to Structure Intellectual Property of a Web3 Startup
In this article, we explore and analyze the different needs of Web3 products in terms of intellectual property (IP) structuring to ensure IP asset protection. IP is a key asset for technology companies. It can give companies a competitive advantage in the market and also capitalizes the value of shares of the company. Therefore, reliable legal protection of IP is necessary for a company’s stable growth and a prerequisite for successful fundraising.
Intellectual property protection in traditional technology companies usually involves registration of trademarks and patents, registration of rights to software code and design, and a transfer of all databases into the company’s ownership. IP protection may differ for Web3 products, for example, decentralized applications (DApps), which need their own unique approach to IP protection.
Intellectual property of the on-chain and off-chain parts of a Web3 project
Each Web3 project can be divided into two parts: on-chain and off-chain. The on-chain part usually forms the core of the Web3 product and is a system of smart contracts that "live and work" in a decentralized blockchain network. These smart contracts do not require servers, administrators, domain name providers, or any other centralized IT infrastructure for them to work. The autonomy of their work is ensured by the blockchain network in which they were deployed.
However, in order for end users to be able to interact with on-chain smart contracts, for example, make transactions, mint tokens, and vote in a DAO, interfaces are needed for these activities to take place. In Web3 projects, interfaces include websites, mobile applications, and browser extensions. These interfaces can be conventionally called the “off-chain” part of Web3 products, since they are already centralized solutions that are hosted on centralized servers, require domain names, and sometimes include verification processes (for example, for listing a mobile application in the app store).
IP structuring of the on-chain part of the project
It is important to emphasize that both the on-chain part and the off-chain part of the Web3 product are developed by people. This means that at the beginning of product development, the rights to the code of both parts of the Web3 product must be registered with the company. To do that, each software engineer who has developed a part of the Web3 product, such as the smart contracts, websites, and applications, should sign an NDA and an IP Assignment Agreement. The NDA (Non-Disclosure Agreement) will help protect the commercial secrets of the Web3 product development, and the IP Assignment Agreement will transfer IP rights from the developer to the company.
What happens next for IP in the off-chain and on-chain parts of the Web3 product is interesting and notably quite different. The IP on the off-chain part of the Web3 product is kept by the company, so the company retains the right to publish off-chain objects such as websites and mobile applications, for example, in the future. The on-chain part of the product has another purpose: to ensure complete decentralization and autonomy of the work taking place in the on-chain part of the Web3 product. To make this happen, and eliminate any risks of the on-chain part becoming controlled centrally, the IP for it is published as open source code.
Open source in Web3 projects
Open source code is software code developed by a group of people or a company who have relinquished their exclusive rights to the code and chosen instead to make it public property. To do this, they publish the software code in open repositories, where anyone can access the code and allow anyone to use it.
An important task before publishing software code as open source is choosing the appropriate type of open source license. The open source license is published in the same repository as the software code itself. The license determines the conditions and restrictions of use that the IT community must respect when using the open source code. The license will contain information on rules regarding how the code can be modified, maintained, or improved, for example.
Choosing an open source license for a Web3 product
A key criterion for choosing an open source license is the scope of rights that developers want to secure for this code. This includes the scope of rights for future developers who may want to use the code. For the on-chain part of Web3 projects, the most common types of open source licenses are the MIT License and the GNU General Public License. The GNU license is slightly more restrictive than the MIT license. Any code that is published under a GNU license and subsequently undergoes modification must be republished again under the GNU license. In comparison, the MIT license does not have this requirement; any code published under the MIT license that is subsequently modified does not need to be republished under the MIT license again. There are also a number of other open source licenses that are important for Web3 founders to consider before publishing their code.
The ultimate aim that Web3 founders hope to achieve by publishing the on-chain part of their Web3 products as open source code is to make their Web3 products ownerless and permissionless and their work completely decentralized and autonomous. Thus, the publication of the on-chain part of the software code as open source helps to "decentralize" the ownership of the IP, and eliminate the risks that such intellectual property can be centrally administered or moderated by someone (which, in turn, can discredit the decentralization of the entire project).
Structuring IP of the off-chain part of the Web3 product
In parallel with developing smart contracts for the on-chain operation of the Web3 part of the product, interfaces for these contracts are also being developed. These interfaces allow end users to interact with smart contracts. The list of IP elements that make up these interfaces, including logos, program code, designs, user databases, and domain names, for example, will depend on the type of the interface chosen by the Web3 founders (website, mobile application, chatbot, browser extension).
Each of these elements will require a separate method of protection. For example, to register the rights to the software code and design to the company, IP Assignment Agreements must be signed, which obligate the transfer of rights from the developers to the company. Additional protection methods might include registering a trademark to protect logos and transferring the rights to the domain name or re-registering the domain name administration rights so that they belong to the company, for example.
The Dev Lab company's role in IP Structuring
Software engineers who develop the Web3 product are a critical part of a Web3 project. It is no surprise, therefore, that a Dev Lab company, specifically set up to employ software engineers, plays an important role in IP structuring. The Dev Lab company usually performs the following functions:
- covers the operational tasks necessary for the organization of the product development process (hiring software engineers, renting an office, paying for software subscriptions, etc.);
- accumulates rights to IP objects (program code, design, etc.) developed by the project team;
- chooses the type of Open Source license for registration of IP related to the on-chain part of the product;
- launches interfaces to the on-chain part of the Web3 product (websites, mobile applications, etc.).
Why registering a Dev Lab company is important for fundraising
For the convenience of solving the operational tasks of the project, a Dev Lab company is usually registered in the jurisdiction where the core project team is located. However, Web3 founders are also recommended to consider two other factors. First, whether the jurisdiction of registration chosen for the Dev Lab company is IP/IT-friendly. Second, whether that same jurisdiction is fundable. Key questions to ask include:
- will chosen venture investment instruments work there?
- are there well-developed legal practices for structuring a cap table?
- will investors feel comfortable investing in a company registered in that jurisdiction?
Favorable jurisdictions might include the state of Delaware in the US, the UK, Singapore, Estonia, and the UAE.
This will allow Web3 founders to close the early stages of investment smoothly, even without a finalized tokenomics strategy or White Paper. This is why classic conversion instruments (SAFE/Convertible Note) and Token Warrant are often signed to receive tokens in the future.
Getting started with IP structuring for a Web3 project
In summary, it’s crucial to treat the IP protection of the off-chain and the on-chain parts of the Web3 project differently.
IP protection for the on-chain part (i.e., the smart contracts) usually requires Web3 founders to:
- register a Dev Lab company in an IP/IT-friendly jurisdiction (technically, this is needed for both the on-chain and off-chain parts IP protection);
- sign the NDAs and IP Assignment agreements with the developers who work on the smart contracts development;
- choose the right open source license (MIT and GNU are among the most popular options); and
- publish the source code with a corresponding license in an open repository.
This is needed to decentralize the ownership of the DApp and make sure the project can’t be modified in a centralized way.
To protect the IP of the off-chain part (website, mobile app, browser extension, etc.), Web3 founders usually need to:
- register a Dev Lab company in an IP/IT-friendly jurisdiction like Delaware in the USA, the UK, Singapore, Estonia, or the UAE.
- sign the NDAs and IP Assignment Agreements with the developers who work on the interfaces of the Web3 product.
- transfer the ownership rights of IP assets, like domains and databases, to the Dev Lab company and register patents and trademarks for the company’s name, logo, and other relevant assets.
Although it’s quite a simple process, difficulty can arise when researching the most suitable jurisdiction options for registering the Dev Lab company. Founders may struggle to know where to start, especially as most lawyers specialize in only one (or a few) jurisdictions and therefore can rarely serve as a single source for comparing jurisdiction options. Only once a jurisdiction has been chosen will local lawyers be able to help with company registration, prepare the right agreements for the team, and manage the trademark registration process.
At Legal Nodes, we’ve created a platform that helps Web3 founders solve legal matters in one place. Starting with a Legal Discovery Session, founders can meet the Head of Web3 Legal at Legal Nodes, who explains the different regulations that might affect the project and which countries are the most crypto-friendly for legal structuring. From there, Legal Nodes builds a legal roadmap that includes the most important legal tasks needed to achieve the business's core goals. Founders are then assigned a dedicated Virtual Legal Officer who is specially positioned to orchestrate the workload and manage the relationships of the different locally-based lawyers working to solve the different legal tasks.
Disclaimer: the information in this guide is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.