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 intellectualproperty 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 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.
