Corporate Founders’ Inventions and Duty of Loyalty to the Corporation

A large part of the literature dealing with corporate law & governance and innovation focuses on directors’ role in promoting, investing and coordinating innovation processes. Such an approach is based on the view of innovation as a team process, where R&D laboratories or departments – requiring significant financial investment - play a crucial role in bringing new products to the market. Innovation based on large teams of researchers, each of whom masters specific details of a new project, dates back to profound industrial changes which took place in the end of the 19th century, especially in the chemical and electrical industries, and that soon affected most other industries. Before such changes took place, inventors had often worked alone and founded their own business for exploiting their own inventions (see for instance  Eli Whitney, who co-founded ‘Miller&Whitney’ for exploiting his cotton gin invention or, later in time,  Thomas Edison, who founded several companies, active in the exploitation of his inventions and which he controlled through the ‘Thomas A. Edison inc.’ holding). 

In contrast to the team-based model of innovation, the end of the 20th and the beginning of the 21st century witnessed the resurgence of corporate founders as inventors – i.e. individual inventors, or at times pairs of inventors, whose knowledge and vision represent pivotal industrial assets on which the success of their corporation is based. Modern corporate founders in highly innovative environments conceive inventions which often create new product markets that no one had even thought about before. Steve Jobs, Jeff Bezos, Bill Gates or Mark Zuckerberg are only a few of thousands of corporate founders who have greatly contributed to the progress of today’s globalized society. These inventors often sit on the board of directors of the corporation they have helped to found and still provide technical knowledge and a vision for the development of their original inventions. 

The union of the identity of 'inventor' and 'corporate founder' prompts questions which go well beyond those dealt with by the traditional literature on corporate governance and innovation. In particular, how do corporate law rules affect corporate founders’ incentives to invent within the corporation they have founded and/or to eventually leave that corporation? Empirical evidence resulting from the personal history of many corporate founders shows that the first corporation which they founded and/or worked for has not always been the organization where they have conveyed their most successful visions. By contrast, difficulties, conflicts with co-founders (such as for instance the 1984 conflicts between Steve Job and John Sculley regarding the future of computing) and other drawbacks (such as for instance lack of commercial attractiveness of the first commercialized versions of the innovative product) are not uncommon in the early career paths of successful corporate founders. Founders’ break-ups with the companies they founded and in which they started their career, and/or  break-ups with their fellow co-founders, may be felt as painful on a personal level. Nonetheless, they often produce mobility and creativity from the point of view of innovation, as they allow further combinations of those knowledge building-blocks that, according to Brian Arthur, form the basis of inventions. 

Several aspects of the relationship of corporate founders vis-à-vis both co-founders and corporation are often regulated by contractual provisions, such as the so-called 'operating agreement' or 'founder agreement.' Nonetheless, corporate fiduciary law has traditionally regulated those relationships with an additional core set of provisions that have been intended in many legal traditions as non-negotiable or only partially negotiable, among which are corporate opportunities rules and directors’ duty not to compete with the corporation. 

My paper provides a discussion of the relationship between corporate founders’ incentives to commit to innovation, directors’ inter-corporate mobility and certain corporate law rules, such as corporate opportunities and the directors’ duty not to compete with the corporation. It argues that the possibility to waive corporate opportunities rules under Delaware law constitutes a great achievement not only for venture capital directors who often find themselves in a position of divided loyalty but also for corporate funders’ inventions, especially in the early stages of their careers. By contrast, the adoption of corporate opportunities rules in most European countries without a provision that allows them to be waived in the bylaw has introduced a potential hindrance both for certain venture capital investment strategies and for corporate founders’ commitment to invent.   

Marco Corradi is senior research fellow and lecturer, Stockholm Centre for Commercial Law at Stockholm University and IECL at the University of Oxford.