Article | Journal of Law, Economics & Organization | October 1995

Start-ups, Spin-offs, and Internal Projects

by James J. Anton and Dennis Yao

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."

Keywords: Business Startups; Projects; Motivation and Incentives; Rights; Employees; Innovation and Invention; Compensation and Benefits; Knowledge Sharing; Capital; Profit;

Citation:

Anton, James J., and Dennis Yao. "Start-ups, Spin-offs, and Internal Projects." Journal of Law, Economics & Organization 11, no. 2 (October 1995): 362–378. (Harvard users click here for full text.)