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.
