Intellectual Property – 7 Deadly Sins Startups Make
Building a company from a great idea is the dream of many. Far too often, however, entrepreneurs make simple—but costly—missteps along the path when it comes to their intellectual property (IP) assets. Sometimes, the mistakes are correctable at a reasonable cost. Occasionally, however, the sin is so great that recovery breaks the bank. Or is impossible.
Avoid these seven deadliest sins with your tech to increase your startup’s chances of success.
Deadliest Sin #1: Skipping Intellectual Property Protection Entirely
“Do I even need a patent? Or a trademark?” We hear this all the time. The answer for just about every emerging tech company is undeniably “YES.”
At first, not filing patent or trademark applications might seem attractive. Good attorneys don’t come cheap, after all, and finding a good one might take more time than you’d like to invest right out of the gate.
Don’t skip this step!
“Why not,” you ask?
Well, for starters, almost every round of funding you’ll be chasing soon will require some kind of collateral. Intellectual property assets, even if they are still awaiting approval, provide perfect collateral.
Second, potential investors are asking about intellectual property portfolio strength before writing a check more and more these days. Having an intellectual property strategy, or better yet a couple of filed patent and trademark applications, clearly demonstrate that your tech is a viable business, and not just a good idea.
At the very least, then, spend one hour with a competent IP attorney you trust to find out exactly what intellectual property assets you need early, and which ancillary protections can wait. You’re spending every waking moment pursuing this idea. You owe it to yourself (and your future employees) to dedicate just 60 minutes early on to have that conversation and know what patents, trademarks, copyrights, trade secret protection, etc. will require more of your time and resources down the road.
Deadliest Sin #2: Cheaping out on an Initial Patent Filing
Imagine you’re building your dream house, a 3-story Tudor-style with a slate roof. The lot is in a perfect location, and your architect really outdid herself on the design work. Your contractor has hired experienced builders to assemble the best materials available. You’re still on budget when it comes time to hire the team to pour the concrete foundation. Three bids come in, and one is an outlier—their estimate is far below the others, on both material costs and labor. It seems too good to be true! Your contractor warns you to be careful, but with the additional savings you could upgrade from domestic granite to Italian marble floors … you’ve always wanted Italian marble floors.
So you pull the trigger and hire the lowest bidding concrete team. What could possibly go wrong you wonder? Nobody actually sees the foundation anyway, right?
By now you should be cringing. It sounds absurd, doesn’t it?
Well, it would be equally absurd to try to stake out your patent rights on your own, or using the cheapest patent attorney you could find, too.
The very foundation of your future company will rest on the strength of its intellectual property portfolio. Intellectual property holdings represent about 80% of a modern company’s value. Think about that–if your vision is to build a billion dollar company, you’d better have a plan to build an $800 million IP portfolio! Why would you trust the first key step in that process to someone who barely knows what they’re doing?
Why not do it yourself?
Yes, if you happen to be an intellectual property attorney, but unwise otherwise. While the federal statutes that govern U.S. patent and trademark law are rooted in the earliest days of the nation, the USPTO and the dozens of federal courts interpret those laws daily. These ever-shifting interpretations mean that the requirements for a patent or trademark application in effect today are very different than the requirements from just a year ago. A skilled patent or trademark attorney will be up-to-speed on the latest changes to the law, and will be better equipped than you ever need to be to prepare an application that meets both your needs and today’s legal requirements.
Yes, the cost of a high-quality patent application can reach 5 figures in some instances; trademarks typically cost less, but getting both initial filings right on the first try is paramount to keeping your nasty neighbors off your land. But a skilled IP attorney dedicated to your success (and not just their own bottom line) will be able to keep those costs in-check as much as possible.
Deadliest Sin #3: What we Have Here is a Failure to Communicate … with Each Other
Hand-selecting your team members as the need arises is one of the tremendous benefits of building a startup company from the ground up. The inherent trust you place in each other to single-mindedly pursue the team’s objective is palpable.
But over time, and especially as your team grows, what was once a clearly defined goal becomes, well, more complicated. Maybe the tech you thought would solve your problem didn’t work out as well as you thought, and now you’re on a second (or third) attempt using different technology. Or your team grew explosively, and work is being done by an engineer that you’ve barely met. Maybe you are spending more and more time meeting with potential investors and advances are being made back at the shop that you aren’t even aware of.
Whatever the reason, many startups fail to capture all of the innovations that are spawned by their team members. The end result can be catastrophic; tech that you assumed that the company owns outright may be owned by multiple individuals.
Correcting these oversights can be expensive, and embarrassing. Most often, these issues rear their ugly heads when an investor is ready to put serious dollars into the venture. Right before closing—when you can see the checkered flags waving—you’ll get a phone call from your deal attorney telling you there’s a problem. Some patent or trademark in the portfolio is missing some paperwork and you need to track down So-and-So who contributed to the IncrediWidget project three or four years ago to get them to sign some papers.
Except So-and-So left because she disagreed with your team’s direction, and has now started her own competing startup company. You’re certain she won’t sign anything now, or will demand a ridiculous payout to do so.
Your attorney will say. Just send us over a copy of her employee agreement because naturally that will have language assigning all of her innovation rights to the company.
Needless to say, you do not want to have to call your potential investors and tell them that you need more time to get some paperwork completed that you should have had done years ago. Talk about undermining whatever confidence you’d established with them during your pitch and follow-up meetings!
The good news: an ounce of prevention, when done correctly and consistently, can effectively avoid all of this mess.
That ounce of prevention has just a few components, which should be high on your priority list as you build your team.
First, everyone you bring onto your team as an employee, collaborator, adviser, mentor, technician, or light bulb changer should sign an employee agreement. The agreement doesn’t need to be complex or expensive, but it should clearly include language that assigns the employee’s rights in anything they create to the company.
This should not be negotiable.
In the U.S., the person that creates an innovation owns rights in the innovation personally. It doesn’t matter if your employee used your equipment during “normal” business hours while getting paid by you to create the innovation. Until some signed document assigns rights in the innovation to some other person or entity, the creator remains the owner.
Employees will leave your team; be prepared for this by getting them to sign on the dotted line BEFORE they get their hands dirty. (Note that the language required for this under U.S. law changed recently; a major university lost tens of millions of dollars on a newly developed drug because they used the “wrong” language. So it is worth consulting your favorite IP attorney before rolling out an employee agreement.)
Second, everyone on your team should sign a non-disclosure agreement BEFORE you get them up to speed on what you’re developing and how. A great place to include non-disclosure language is in that employee agreement mentioned above.
Third, your company should have a FORMAL invention disclosure process in place. That process should include some kind of documentation for every innovation (think: problem solved) by your team. Large companies have special forms constructed by their legal departments to accomplish this; there’s no reason you can’t have a similar type of document (electronic is OK but not ideal), too. Your favorite IP attorney likely has several examples to get you started on building your own.
At a minimum the documentation should include:
(1) the names of all contributors, even if every person on the list may not qualify as an “inventor” for patent purposes;
(2) the date(s) on which the innovation was created;
(3) a description of the problem solved by the innovation;
(4) a description of why existing technologies couldn’t solve the problem—note here that it is perfectly OK if the reason was that some other company owned the only known solution and your team developed an alternative (better: improved) solution to the same problem;
(5) a description, in painstaking detail, of how the innovation developed by your team solves the problem; and
(6) signatures of each of the contributors immediately after language that assigns their individual rights in the innovation to your company.
For bonus points, also include:
(7) sketches, drawings, photos of the equipment used;
(8) any instrument settings used on testing equipment; and
(9) descriptions of FAILED attempts—these will be especially valuable down the road to convince patent examiners that the innovation is patentable.
Note that explanations of HOW the innovation might operate (e.g., theory, conjecture, etc.) should be left out of the documentation. Those statements (even if ultimately incorrect) might hurt your ability to get the patent granted.
“This all seems very complicated and involved,” you might be thinking.
Maybe, but intellectual property protection on pieces and parts of your technology may be even more valuable than the IP covering the finished tech product itself. Consider Amazon’s “one click” patents. They certainly don’t cover the entire Amazon online platform; just one small aspect of it. But they are worth BILLIONS in additional revenue, literally. Not to mention the unmeasurable additional value created by the media’s long-sustained buzz about the one-click patents since the late 1990s. Simply put, Amazon’s one-click patents, specifically covering one small innovation amongst its complex e-commerce platform, contributed significantly to its bottom line. Purposefully capturing innovations as your team develops them will help you avoid missing similar bottom line-changing opportunities.
With just these three simple steps, you’ll be ahead of the curve on making sure your startup actually owns the inventions you’re paying your team to develop.
Deadliest Sin #4: Weak Vendor Contracts
Every contractor you use should have a signed independent contractor agreement clearly assigning the final work product to your company. This seems like a no-brainer, but independent contractor relationships cost young companies insane legal fees more often than you’d think.
For example, I represented a hospital equipment manufacturer years ago that bought the heart monitor machine division of a foreign equipment manufacturer. The foreign company had hired an independent contractor to develop the software platform that controlled every single model of heart monitor in the company’s portfolio. However, the programmer never signed a contractor agreement, so my client’s risk of getting sued by the programmer after closing was seriously high.
To my surprise, the programmer had no interest in signing over his rights in the operating system. Instead, he held up the deal for months, demanding an outrageous fee even though he had already been paid in full for writing the software in the first place! I talked him out of the fee demand, and eventually into signing over his rights in the finished operating system. But the client hadn’t planned on a months-long delay in closing the deal. The delay impacted the timing of their sales launch with the new line .
Not an ideal situation, to say the least, and the solution cost a ton more than that ounce of prevention (in the form of a basic independent contractor agreement between the foreign manufacturer and the programmer) would have cost.
Deadliest Sin #5: Premature Demo
I know—I KNOW—that as soon as you have a functional prototype that you want to show it off. Who wouldn’t? It’s what you’ve all been working so hard to build!
In the past, showing off an unprotected prototype wasn’t that big of a deal, in the U.S. at least. But a few years ago, the U.S. patent system changed from a “first to invent” format to a “first inventor to file” system. This change in the law brought the U.S. much closer to the “first to file” system used by the rest of the industrialized world.
What does that mean?
It means that you probably shouldn’t show off your prototype, or any functional part of it, until you’ve filed a patent application that covers the prototype.
“Why can’t I just have everyone sign a non-disclosure agreement before I show them the prototype?” you might be wondering.
That’s certainly one possible work-around, but even that has issues.
Let’s say you want to show a potential investor your working beta version of the app you’re building. It’s not completely done, but it’s functional enough for a show-and-tell. But you’re not ready to pull the trigger on a patent application just yet.
So you convince your potential investor to sign a non-disclosure agreement. You show her the prototype and she loves it! You agree to connect again in a few weeks to finalize a term sheet.
As you finalize the last features of the app over those next few weeks, you’re unaware that your potential investor gave her notes from the demo to her patent attorney and told him that she wants a patent application filed. Your potential investor’s patent application is on file before your term sheet meeting ever happens. To your surprise, and without explanation, she cancels your meeting and vanishes.
Maybe. But it’s possible and under the new U.S. law, your only recourse is to sue the potential investor in federal court. Of course, you won’t even know that she had her own patent application filed for at least 18 months, the period of time under which most patent applications remain secret.
So what, you say?
She’s not going to be able to build a full functional app before you can get yours on the market.
Maybe true, but as soon as you’re bringing in a steady stream of revenue, guess who’s likely to come along threatening patent infringement based on her now-issued patent?
Yes, you’d have a great affirmative defense under this hypothetical. But do you—or your stakeholders—really want to spend years and millions defending a patent infringement suit, even if it is totally bogus?
Wait a minute, you say, she signed a non-disclosure agreement. Isn’t filing a patent application a “disclosure”?
Absolutely. But enforcing a non-disclosure agreement involves more litigation, and that means more investment dollars/revenue diverted to courtroom fights instead of product development and marketing.
Filing a patent application early avoids all of this. If you filed yours before the demo, your potential investor’s later-filed patent application could not issue as a patent. Your application would have been in line ahead of her at the patent office, and her efforts to manufacture a legal battle would have been completely avoided.
Deadliest Sin #6: Failing to Protect Version 2.0
If you’ve followed the advice above, you’ve filed a patent application on your core technology by the time your prototype is ready for show-and-tell. That stage inevitably demands changes to the prototype before wide-scale rollout can occur.
Do not—I repeat DO NOT—forget to call your patent attorney once you’ve decided on a list of features to add or change to your prototype. Your initial patent application may already include those changes to the prototype, in which case you’re fine.
Most likely, however, you’ll need a second patent filing to include those prototype changes.
The same holds true if your branding or marketing messaging shifts after testing your prototype. Keep your trademark attorney in the loop on any shifts like these…BEFORE they’re implemented. Otherwise you run the risk of having to re-rebrand if, for example, a competitor is already using confusingly similar words or phrases in their marketing efforts.
Deadliest Sin #7: Burying Your Head in the Sand
You are almost singularly focused on one goal: getting your project in the hands of consumers. Since launching your venture, you’ve kept that goal in mind every day.
Chances are, though, you started this adventure after recognizing that the products already existing in the marketplace were inadequate. Or crude. Or underpriced.
Chances are, too, that you aren’t the only one looking at this opportunity. We all know that keeping tabs on your competition is necessary to prepare for questions from potential investors.
But did you know that your IP attorney can help? Pending patent applications publish on a weekly basis, both in the U.S. and internationally. Give your attorney a list of known competitors—both company names and key individuals. It takes no time to set up automatic searches of published patent applications based on that list; and knowing what your competition is up to just might help you avoid reinventing someone else’s wheel.
Conclusion for Protecting your Intellectual Property
As an entrepreneur, you owe it to yourself, your employees, your investors, and your (future) customers to tackle these intellectual property issues early on. The low cost of prevention far outweighs the penalty for waiting too long. You can do many of these tasks yourself. Others require a short consultation with an IP attorney, but isn’t your startup worth a one-hour phone call?
About Incubate IP
Randy Micheletti, an experienced USPTO-registered patent attorney, founded Incubate IP specifically to help startup companies succeed. Contact Incubate IP at 312-600-5412 or through its web site for a free custom intellectual property needs assessment. Yep I’m an attorney. But while this post obviously contains wildly valuable information, it is not legal advice you should act upon. Always sit down for a chat with an attorney before implementing an intellectual property strategy to protect your ideas.
What lessons about Intellectual Property planning have you learned as an entrepreneur? Share your experiences in the Comments section below.