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Start-ups, Spin-offs, and Internal Projects

James J. Anton and Dennis A. Yao
Journal of Law, Economics, & Organization
Vol. 11, No. 2 (Oct., 1995), pp. 362-378
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/765002
Page Count: 17
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Start-ups, Spin-offs, and Internal Projects
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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 law, and legal "shop rights."

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