Start-ups, Spin-offs, and Internal Projects

James J. Anton () and Dennis A Yao

Journal of Law, Economics and Organization, 1995, vol. 11, issue 2, pages 362-78

Abstract: We examine the incentive problem confronting a firm and employee when the employee privately discovers a significant invention and faces a choice between keeping the invention private and leaving the firm to form a new company (start-up), or transferring knowledge and attempting to gain compensation from the firm (spin-off). We focus on inventions that require little start-up capital and for which property rights are either missing or very weak. In such settings, the employee will sometimes form a new company even though joint profits would have been greater had the invention been developed with the original firm. We also identify when the firm has an incentive to pay a substantial sum to the employee via a spin-off, thereby deterring a start-up. Finally, the basic analysis is applied to examine several issues including specific versus general innovations, trade secret laws, and legal "shop rights." Copyright 1995 by Oxford University Press.

Date: 1995
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