Intellectual property issues often are among the most important considerations that a technology startup will encounter. A startup will face numerous issues involving developing a product, hiring qualified employees, raising capital, and more. With all of these issues, intellectual property can feel distracting, expensive, or contrary to the goals of just getting a product to market before someone else does.
However, intellectual property is often the most valuable asset of a technology startup. Protecting intellectual property can be essential to obtaining venture capital funding or preventing competitors from unfairly competing with you.
In this article, we provide 10 critical intellectual property strategies for you to implement.
1. Keep your employment work separate from your new idea
It is certainly scary to give up a current paycheck and take the risk of working long hours on a startup for no pay. However, one of the biggest pitfalls at the beginning of a company is when a founder starts working on their new idea at the same time they are working for someone else.
Conflicting obligations can put ownership of your new company’s intellectual property at risk. It is important to know what was done, what resources were used, and where the founding work was done. Know your employment obligations, including the obligations related to assignment of intellectual property and noncompetition. Most companies will require their employees to sign a Confidentiality and Invention Assignment Agreement, in which the employee acknowledges and agrees that any new ideas and inventions developed by the employee related to the business of the employer is owned fully by the employer.
Unless an employer expressly approves side projects (without claiming an ownership right), it is a bad idea to use company resources and time to do something other than your day job. A lot of people don’t want to tell their employer about their new idea and keep their project “under the radar.” This can be a problem, particularly if the new venture is closely related to the employer’s business.
2. Don’t let other people claim ownership of your IP or your company
Some of the best new ideas are developed over discussions with friends, in dorm rooms, or with other entrepreneurs over drinks or coffee. Let’s face it, it is fun to talk about exciting ideas and to get others’ ideas along the way. The informality of these discussions often cause people to submit funding applications together, to hold each other out as co-founders, and to loosely talk about equity shares.
When you actually have a co-founder, you absolutely have to agree on the terms of your relationship with the co-founder. Not doing so can cause enormous problems later. In a way, think of the founder agreement as a form of “pre-nuptial agreement.”
Here are the key deal terms you need to address in some kind of written founder agreement:
-Who gets what percentage of the company?
-Is the percentage ownership subject to vesting based on continued participation in the business?
-What are the roles and responsibilities of the founders?
-If one founder leaves, does the company or the other founder have the right to buy back that founder’s shares? At what price?
-How much time commitment to the business is expected of each founder?
- What salaries (if any) are the founders entitled to? How can that be changed?
-How are key decisions and day-to-day decisions of the business to be made (majority vote, unanimous vote, or certain decisions solely in the hands of the CEO)?
-Under what circumstances can a founder be removed as an employee of the business? (Usually, this would be a decision by the company’s Board of Directors.)
-What assets or cash into the business does each founder contribute or invest?
-How will a sale of the business be decided?
-What happens if one founder isn’t living up to expectations under the founder agreement? How is it resolved? (A favored approach is for any disputes to be resolved by confidential binding arbitration.)
-What is the overall goal and vision for the business?
- Does everyone agree that all intellectual property is owned by the company and, if not, how does the company ensure its right to use the technology developed for its benefit?
Informal or vague understandings that are not carefully documented are fraught with peril. With respect to friends and acquaintances, be careful in discussing ownership stakes and sharing of information. Keep records of where ideas came from, as well as of any sort of discussions about equity stakes. If a proposal is submitted to potential funding sources, it is good to keep a copy because future investors may want that information.
And here’s the hard part: if things change and a friend or colleague is no longer going to be part of your initiative (and if you have not planned on parting ways), make sure you communicate a message in writing that clearly demonstrates your understanding of your idea, what is yours and what is theirs. Remember, if you have a billion-dollar idea, it is cheaper and more cost effective to resolve these sorts of issues in the beginning rather than when you file for an IPO or are about to sell the company.
3.Have contributors assign their IP to the company
A number of different stakeholders may contribute intellectual property to your new company. In addition, innovation often occurs prior to formation of a company. Generally, intellectual property rights belong to the individual who created the work in the first place, absent an agreement to the contrary. Moreover, in some states like California, state laws permit employees who develop inventions on their own time to retain intellectual property and assignment rights so long as the employee does not use company equipment, supplies, or facilities. Independent contractors have even more rights. Written agreements can make sure that all rights are assigned to the company. In fact, a written agreement is required for certain types of intellectual property assignments.
Ensuring that a startup owns the intellectual property rights is critical. It is important to clearly identify who owns what. A startup should take the following steps to ensure it owns the intellectual property necessary for its business:
- Any intellectual property created pre-incorporation should be transferred to the company via a written agreement. Often, the transfer occurs in exchange for shares in the company or for money.
-All employees should sign Confidentiality and Invention Assignment agreements requiring assignment of intellectual property as a condition of employment.
-All consultants/independent contractors should sign agreements clearly stating their obligation to assign intellectual property they develop for the company to the company.
-Any business partners or joint development efforts should clearly articulate the ownership rights of the business partners, including the ownership of joint development effort.
These agreements should also require the following:
- An understanding that the company’s confidential information is only for use for the benefit of the company;
-A disclosure requirement of any ideas, inventions, and discoveries related to the agreement or employment; and
-A clear statement of ownership rights over ideas, inventions, and discoveries.
4. Evaluate your core assets and decide on the type of IP protection you need
Cash is king at startups. Ever wary of minimizing burn rate, technology startups may be tempted to defer investment in intellectual property protection. To those who have not tried to protect intellectual property, it feels complex and expensive. Too often, startups end up forfeiting intellectual property rights by neglecting to protect their hard work.
Some simple and cost-effective techniques can minimize the anxiety yet help protect core assets. A good starting point is to critically evaluate the value proposition of your company and the intellectual property assets that are critical to those value propositions. This kind of evaluation is helpful in raising funds and can be critical in protecting your core assets.
Companies sometimes think that patent protection is the only way to protect itself. Technology startups frequently ignore the value of non-patent intellectual property. While patents can be incredibly valuable, it does not necessarily ensure that a company’s product is a good product or that it will sell well. Trade secrets, cybersecurity policies, trademarks, and copyrights can all be forms of IP that can be protected. Spending a little time to evaluate the company’s value proposition, and the best way to protect it, can be very important over the long haul.
Here is a summary of the types of intellectual property available.
Patents. Patents are the best protection you can get for a new product. A patent gives its inventor the right to prevent others from making, using, or selling the patented subject matter described in words in the patent’s claims. The key issues in determining whether you can get a patent are: (1) Only the concrete embodiment of an idea, formula, or product is patentable; (2) the invention must be new or novel; (3) the invention must not have been patented or described in a printed publication previously; and (4) the invention must have some useful purpose. In the United States you obtain a patent from the U.S. Patent and Trademark Office, and this process can take several years and be complicated. You typically need a patent lawyer to draw up the patent application for you.
Copyrights. Copyrights cover original works of authorship, such as art, advertising copy, books, articles, music, movies, software, etc. A copyright gives the owner the exclusive right to make copies of the work and to prepare derivative works (such as sequels or revisions) based on the work.
Trademarks. A trademark right protects the symbolic value of a word, name, symbol, or device that the trademark owner uses to identify or distinguish its goods from those of others. Some well-known trademarks include the Coca-Cola trademark, the American Express trademark, and the IBM trademark. You obtain rights to a trademark by actually using the mark in commerce. You don’t need to register the mark to get rights to it, but federal registration does offer some advantages. You register a mark with the U.S. Patent and Trademark Office.
Service marks. Service marks resemble trademarks and are used to identify services.
Trade secrets. Trade secrets can be a great asset for startups. They are cost effective and last for as long as the trade secret maintains its confidential status and derives value through its secrecy. A trade secret right allows the owner of the right to take action against anyone who breaches an agreement or confidential relationship, or who steals or uses other improper means to obtain secret information. Trade secrets can range from computer programs to customer lists to the formula for Coca-Cola.
Confidentiality Agreements. These are also referred to as Non-Disclosure Agreements or NDAs. The purpose of the agreement is to allow the holder of confidential information (such as a product or business idea) to share it with a third party. But then the third party is obligated to keep the information confidential and not use it whatsoever, unless allowed by the owner of the information. There are usually standard exceptions to the confidentiality obligations (such as if the information is already in the public domain).
Confidentiality Agreement for employees and consultants. Every employee and consultant should be required to sign such an agreement as discussed in Section 3 above.
Terms of Service and Privacy Policy. If you are a company that conducts its business on the internet, it is important to have a terms of service agreement that limits what users can or cannot do on your website and with the information on your site. Closely related is your Privacy Policy, which sets forth what privacy protections are available to your users.
Knowing your IP and how it is protected is often a very material issue for investors and acquirers. These assets often need to be disclosed through a “disclosure schedule.” To make sure the company knows what it has, it is a good practice to keep copies of everything in an online data room, including:
-Patents and patent applications (including patent numbers, jurisdictions covered, filing, registration and issue dates)
-Confidentiality and Invention Assignment Agreements with employees and consultants
-Trademarks and service marks
-Key trade secrets and proprietary know-how
-Technology licenses from third parties to the selling company
-Technology licenses from the selling company to third parties
-Software and databases
-Contracts providing for indemnification of third parties for IP matters
-Open source software used in (or used to create) the seller’s products and services
-Claims for infringement of IP, including any IP litigation or arbitration
-List of domain names
-Liens or encumbrances on the IP
-Source code or object code escrows
-Social media accounts (Twitter, Facebook, LinkedIn, etc.)
5. Make sure you have a great name
Your brand can be immensely valuable in the marketplace. Startups should make sure their name and any logos are clear for commercial use. Here are some of the steps to avoiding naming issues:
-Do a Google search on the name to see what other companies may be using the name.
-Do a search at the U.S. Patent and Trademark Office website for federal trademark registrations on your proposed name.
- Do a search of Secretary of State corporate or LLC records in the states where the company will do business to see if anyone is using a similar name.
-Do a search on GoDaddy.com or other name registrars to see if the domain name you want is available. If the “.com” domain name is taken, this is very problematic and a red flag.
-Make sure the name is distinctive and memorable.
-You might want to have your intellectual property lawyer do a professional trademark search.
-Don’t make the name so limiting that you will have to change it later on as the business changes or expands.
-Come up with five names you like, and test market it with prospective employees, partners, investors, and customers.
-Think about international implications of the name (you don’t want to have a name that turns out to be embarrassing or negative in another language).
-Avoid unusual spellings of the name. This is likely to cause problems or confusion down the road. (While some companies like Google or Yahoo have been successful with unusual names, such success is often the exception rather than the rule.)
If the names and logos are available to use, startups should register them as trademarks. In addition to preventing competitors from taking or using the company’s name, trademarks help a young company build a unique and identifiable brand. This, in turn, promotes a startup’s visibility in the marketplace. You can also create a record as an early user of the name and logo. Trademarks are also relatively cost effective, with U.S. Patent and Trademark office fees charging as little as $225 to file an application.
6. Patent strategy should be cost-effective and not avoided
Patents can be valuable assets of the company. Patent portfolios are often understood to provide offensive benefits—as a way to box out competitors in similar technology spaces. However, patents have extensive defensive benefits as well. For example, a defensive patent portfolio can serve as an important bargaining chip in the event a startup is threatened with patent infringement by a competitor. This can either lead to a number of relatively favorable outcome for a startup including better settlement terms or an opportunity to cross-license. It may also permit an opportunity to file counterclaims if any litigation is initiated.
A common question people ask is, How many patents should I file? A lot of companies spend extraordinary amounts on a wide-ranging field of patents. Others spend nothing. Normally, both of these decisions are a mistake. As a technology startup, developing a wide-ranging patent portfolio is time consuming, expensive, and unlikely to provide a return on investment in the short term. Filing a large number of cheap but poorly drafted patents also rarely creates value for startups. A best practice is to seek patents directed to the core value of your innovation. Another best practice is to seek patent claims that can actually be monitored. In other words, you should be able to learn enough about a competing product to see if the other company is infringing.
Startups can start the process of patent protection without breaking the bank. For example, a startup can file a short and focused document called a “provisional application.” A provisional application is simply a description (it can even be a manual or a preliminary architectural diagram) of your technology and how it works. This preliminary filing generally can be used to show when you invented your technology, and it gives you a year before you have to put together the more costly formal documentation needed for the patent-application process.
Additionally, young companies concerned about a lengthy and expensive prosecution process can strategically use the U.S. Patent and Trademark Office’s “Track One” program. This program permits a startup to go through a prioritized examination of their application and obtain a patent as soon as within one year of filing.
Some companies fear “patent trolls” because of the nature of their business. Having your own patent is not necessarily a defense against someone else’s claim. If you are worried about patent trolls, evaluate low-cost services that can assist you. While patent infringement insurance is often costly and hard to find, numerous other low-cost or no-cost strategies exist to hedge against patent troll risk. Some companies such as LOT Network are free for small companies. Other organizations, such as RPX and Unified Patents, are also worth considering. For certain types of companies, these services can provide additional protection.
7. Consider a global patent strategy, including China
Having a global strategy in mind, even in the early stages, can be an important consideration for startups. In an effort to protect their inventions quickly and cost effectively, startups often overlook international standards of protection. Accordingly, down the line when a startup looks to start expanding to international markets, it may find itself stuck without protection in important countries. Filing without understanding what international protection a company requires may result in international application time frames lapsing, barring a company from international protection. At a minimum, talk with your patent attorney about international protection.
If your company is a manufacturer of hard goods (as opposed to software), you should consider seeking patent protection in China. Many people contend that China is a terrible place to protect intellectual property. While seeking to protect intellectual property in China is a challenge, the law and remedies are rapidly evolving. Chinese patents are often relatively inexpensive to obtain. If you plan to operate in China, having patents there can be helpful.
8. Take care in using open source software
In developing software, startups may elect to incorporate open source software into its code. Use of open source software is generally free and may often expedite development. However, open source licenses must be read carefully. If the open source code is used in a way not permitted by the license, startups may face threats of breach of contract or copyright infringement. Moreover, in some cases, under certain open source licenses, use of an open source code in a customized startup product may inadvertently transform a startup’s proprietary code into open source software. Not only is IP protection lost, but a startup’s proprietary and confidential code could be publicly disclosed. Accordingly, any company that is developing software should be aware of the risks and enact a strict protocol on how and when open source may be used by its developers.
9. Only litigate IP disputes out of principle in rare cases
Lawsuits are a cash and time suck that can be distracting for company employees. Emotions run high when someone leaves a company under sketchy circumstances, a business partner breaks a deal, or a patent troll sues you for an exorbitant amount. The board gets riled up, employees get angry, and “policy” arguments are raised. These strong emotions start a dialogue of “we need to fight this on principle.”
Except in the rarest cases (or in cases where the other side is unable to have a business-level discussion), fighting on principle is a mistake. The company will spend tons of money and have core staff focused on litigation instead of company growth. Litigation is normally slow and costly. At the beginning of a case, principle really matters to business executives. After nine months, $1 million in legal fees, and no case progress, the company often feels quite differently. If you feel the need to litigate, make sure you take the long-term view. Only litigate as a last resort or where the upside is very beneficial.
10. Be careful in hiring new employees
You need to be extremely careful in hiring new employees, especially from competitors. You want to avoid litigation from the prior employer that your company is using confidential or proprietary information of the prior employer. In that regard, consider the following:
-Make sure the employee isn’t subject to a relevant binding non-compete agreement.
-Require the new employee to represent that they aren’t bringing over any confidential or proprietary information or files of the prior employer.
-Require the new employee to commit not to use any confidential or proprietary information of a third party.
-Do complete reference checks on the new employer before hiring.
Copyright © by Richard D. Harroch. All Rights Reserved.
Source: forbes
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