You have a great idea, a solid team, the beginnings of a viable product that appears to be gaining early traction in the marketplace, interest from investors, and … what else? Well, for one thing: not enough time in the day to get it all done. And for another: you have intellectual property and it needs to be protected.
What’s the biggest mistake startup entrepreneurs make with respect to their intellectual property, and what can they do to fix it?
That’s the question we recently put to IP attorneys writing on JD Supra, knowing that the diversity of responses would make for interesting reading. We weren’t disappointed. Here’s what we heard back:
1. Entrepreneurs Don't Invest Sufficient Time, Money, and Thought In Their IP
We heard this sentiment expressed in a number of ways, each with a key takeaway for early IP protection:
Waiting Too Long
From Scott Smith, a Palo Alto-based IP attorney with Dorsey & Whitney: “Startup entrepreneurs have been taught, rightfully so, that they need to be extremely cash conscious and to control burn rate above all else. One obvious way to control burn is to keep legal fees to an absolute minimum. With intellectual property, however, skimping too much in the early days can be devastating in the long term and even in the short term. Almost always, a large chunk of a startup’s most valuable, innovative intellectual property is produced in the early days of the company. After all, it is usually the big, 'Aha!' ideas that make entrepreneurs want to start companies in the first place.
Ideally, a startup will invest a reasonable, manageable amount of its budget to protect these big innovations with patent applications from the beginning, and the money spent will pay huge dividends later, as the company adds further innovations and iterations to the big ideas. Unfortunately, I have seen many startups that fail to make this investment. Perhaps they file one, poorly drafted provisional patent application, written by the entrepreneur for example, and do nothing else for a year. Or worse, they don’t file anything, thinking they will wait until they have more funding before “getting serious” about IP. This can be fatal. The U.S. is now a 'first-to-file' country, which means if a company waits too long to file a patent application, it may lose the race completely, even if it invented first. Additionally, most countries have no grace period between the time an invention goes public and when the inventors can file a patent application. This means that if your inventive ideas are published or made available for sale or presented at a trade show before you file a patent application, you have lost almost all patent rights immediately outside the U.S.”
...if you don’t make a decision, the decision might be made for you. - Chris Sloan of Baker Donelson
A Weak Initial Filing
From Timothy J. Shea, Jr., Ph.D., a director at Sterne, Kessler, Goldstein & Fox in Washington, DC: “Too often we see initial filings that are poorly drafted, that are either are too narrow in focus to provide effective protection or too broad to properly support the claim scope sought, and that contain overreaching, speculative language that prejudice the startup's ability to obtain strong protection for its later inventions. Unfortunately, a weak initial patent filing can be devastating for several reasons. First, much, if not most, of the value of startups to potential investors lies in the company's IP - particularly for companies in the biopharma space where actual products will take years to get to market. A weak patent filing that does not adequately protect the company's key technology and products will substantially reduce the value of the company to potential investors. Second, a weak filing can also convey to potential investors a lack of sophistication on the part of the company regarding its IP matters generally. Third, the initial filing will eventually become 'prior art' (and often the most relevant prior art) to the company's subsequent patent filings. To the extent the first filing is overreaching and contains too much speculative language, it can become a dangerous piece of prior art that is cited by the patent office as a basis for rejecting the company's later patent applications to improvements in the underlying technology. So even though the initial filing may be too speculative to adequately support the claims pursued in that filing, it can nevertheless still be effective prior art that "poisons the well" for the company's later patent filings. Fortunately, by engaging a competent patent attorney and devoting the appropriate amount of time, thought and resources to its initial patent filing, the company can have a patent application that provides a strong foundation on which to build a valuable patent portfolio around its platform technology and products."
No Clearance Search
Noreen Weiss Adler, partner at Barton LLP: “Companies with a product that involves new technology or a proprietary business process can make a serious mistake by not investing in a patent clearance opinion. Failing to investigate whether your technology infringes on a pre-existing patent can expose the company to punitive, treble damages if it loses a lawsuit based on infringing a pre-existing patent because failure to conduct a patent clearance analysis (although in and of itself does not lead to a presumption that the company willfully infringed on the pre-existing patent) can still be used as evidence to support a claim of willfulness, which in turn can give rise to punitive damages. Additionally, because the value of the IP can be a start-up’s most valuable asset, lack of a patent clearance opinion can adversely affect company valuation with a resultant negative impact on the amount of capital a company can raise.”
Eugene M. Pak, partner and the leader of Wendel Rosen’s Intellectual Property practice group: “In the rush to get things started and conserve funds, start-ups often overlook doing a clearance search for their brands and filing to register their trademarks. Reserving a corporate name with the Secretary of State, or even filing a fictitious business name statement, is not the same as registering one’s trademarks. Trademark registration, although not required, gives companies broader rights and helps deter others from using the same or similar marks. Since the registration process can take a year or more, getting started early can be beneficial. Under the federal registration system, one can file to register a trademark that has not even been used yet (intent-to-use application), so long as one has a bona fide intent to use the trademark.”
No Focus on Global Patent Standards
Salima Merani, Ph.D., partner at Knobbe Martens: “Startups, with their limited budgets in the very early stages, often file patent applications without an eye towards global patent standards. Years later, when it comes time to pursue international rights outside the United States, the deficiencies from the early days can come back to impede or impair the patent portfolio. Sophisticated startups, typically involving some venture firm board members or serial entrepreneurs, not only engage law firms that have a global perspective, but also invest meaningfully in intellectual property and global strategy even when funds are scarce."
No Real Strategy
Robert Stier, Jr., at Pierce Atwood LLP: “Too often, in a rush to get IP protection, startups assume that all patents are of equal value. They spend money needlessly on patent prosecutions only to obtain claim coverage that is too narrow, and they end up without any real barrier to entry against competitors. Their time and effort would be better spent first understanding the IP landscape and then developing a realistic strategy for cordoning off valuable portions of that territory. That requires more of an investment of time and money up front, but it results in long term savings and a stronger competitive position.”
A strategically-designed patent portfolio is equally as valuable to a company as a robust data package is for its product... - Ray Arner, Pierce Atwood
Ray Arner, also of Pierce Atwood: “Start-ups frequently consider patenting on a piecemeal basis, and in an excessively cost-conscious manner. They opt to spend their money on science rather than legal expenses. This is understandable, but short-sighted. Decisions of this type may cause a start-up to forego formulating a cohesive patent strategy around a nascent product or technology platform. Consequently, their first patent filing is often too soon or too late, or it shoots the project and the patent strategy in the foot. A strategically-designed patent portfolio is equally as valuable to a company as a robust data package is for its product. Investors require both.”
Chris Sloan, co-chair of Baker Donelson’s Emerging Companies group: “This is not to say you should file patents and trademark applications on anything and everything; you can easily spend tens of thousands of dollars doing that. The key is to have a plan and know what you want to protect and when to do it. Put another way, if you don’t make a decision, the decision might be made for you.”
2. Entrepreneurs Seek Patent Protection(s) Too Early
…the key question is how much, and when. - Rick Frenkel, Latham & Watkins
The many points above notwithstanding, Rick Frenkel, a partner in Latham & Watkins’ Silicon Valley office, counters that startups can also place too much emphasis and worry on IP in the earliest stages of the company, thereby “seeking a wide variety of patent protection that later turns out to be unrelated to where the company actually ends up heading.”
Frenkel suggests: “Rather than investing that money with the US Patent & Trademark Office and patent attorneys, it might be better spent on developing the company’s product. Patents are typically used for three major purposes by operating companies (as opposed to patent trolls). First, patents can be used against competitors, to forge a better business position. But this can hardly be true as to startups, since patents take years to grant, and competitors by definition are going to be much better established and with deep pockets. Second, patents can be used for defensive reasons, in case sued by competitors, so the company can fight back. But this is also not too applicable to startups. Most patent-aggressive competitors will take action before the startup’s patents have matured to a point where they are useful. And if that unfortunate event happens, startups can always resort to buying patents to use in litigation. Third, patents are useful to demonstrate that the company has value. This is the one reason startups should seek some patent protection—most VCs would like the company to have some IP protection on the company’s innovations.
But the key question is how much, and when. Investors are not going to be looking to see if every aspect of the company is covered by a patent. Rather, the startup should focus in the first year on proving its concept and demonstrating that its business plan has value, as well as developing its product or service. There may be several dead ends in that process. Once it becomes clear where the company is going to head to become viable, at that point the company should target the two or three major reasons why its technology or business model is differentiated over what has been done before, and seek very strong patent protection from top-notch prosecution firms focused on the company’s core strengths. While patents are important, they are expensive to obtain and it is worth waiting and targeting what turns out to be the valuable assets to protect, rather than rushing into numerous early patent applications that end up having little value.”
3. Entrepreneurs Don’t Focus on How Patents Can Protect Revenue
…not every neat idea is in fact a business. - Jim Coffey, McCarter & English
Michael Guiliana, partner at Knobbe Martens: “Startups often fall into a trap of investing in patents primarily to protect the “genius” of their inventions. For example, excitement over the cleverness or elegance of a technological solution can be a driving force behind investment in patent protection. Such excitement can distract a startup from understanding or focusing on how patents can protect revenue and market share. Sophisticated entrepreneurs should map the drivers of their current, anticipated and potential future revenue streams, and work closely with patent counsel to ensure future patent investments are rationally tied to protecting those revenue drivers.”
Jim Coffey, partner in the Emerging Companies practice group at McCarter & English, offers an interesting perspective on this notion: “A big mistake I see many startups make is the failure to realize early on that not every neat idea is in fact a business. You can have a really interesting patent (or even a family of patents), a trade secret or some other unique know how, but still not be able to commercialize your technology in the U.S. or other foreign market. This may be due to obstacles such as unusually large development costs, unique manufacturing challenges or even governmental or regulatory hurdles. However, in each instance, without a practical solution for clearing the obstacle, the startup will more often than not fail. The entrepreneur who thinks ahead from the get-go and develops a strategic patent plan around finding a solution to a unique problem (that exists in a sizeable commercial market) will always win over the less circumspect founder with the “devil-may-care approach” to technology development.”
4. Entrepreneurs Don’t Focus Enough On IP Ownership
Defining and documenting appropriate ownership is generally easy to do when done at the right time, but can be difficult to subsequently fix... - Tom Arno, Knobbe Martens
Concern over intellectual property ownsership is another of those insights we heard expressed in different ways, each with an important takeaway.
Gaps in IP Title Chains
Tom Arno, partner in the Knobbe Martens San Diego office: “A significant but generally avoidable mistake start-up companies make is failing to establish clear chain of title of intellectual property ownership. This problem has only increased as more startups bootstrap themselves as far as possible with outsourced product development services. Defining and documenting appropriate ownership is generally easy to do when done at the right time, but can be difficult to subsequently fix. Potential investors and acquirers will look for clearly documented ownership of all intellectual property by the target company, and it is surprising how often gaps in intellectual property title chains get discovered during due diligence for these transactions. Even if unresolved questions with regard to chain of title may not prevent investment or acquisition, company valuation can be reduced for reasons that in many cases could have been readily addressed if considered earlier.”
Assignment of Pre-Exisiting IP
Helen Christakos, chair of the IP practice group at Carr-McClellan: “Technology development and the formation of key business strategies often begin long before a company is incorporated. Once the company is formed, all of this ‘pre-existing’ technology and IP must be assigned to the new company. Absent such an assignment, it is likely the individual who creates the technology and IP will continue to own it. If the technology and IP is not assigned to the company, it can create significant problems if the company wants to obtain funding. Angels or VCs will perform legal due diligence on the company, and if it is not clear that the company owns such “pre-existing” technology and IP, this can adversely impact funding and valuation. It is best to assign this “pre-existing” technology and IP to the company at the time of incorporation so the company can issue stock in consideration of the IP and technology assignment, and it does not have to chase down third parties. However, this can be done retroactively as well.”
Written Assigments When Working With Outside Developers
Chris Sloan of Baker Donelson again: “It’s natural for people to believe that, when they pay for work product such as software, they will own it. Unfortunately, under copyright law, that just isn’t the case, except for work that is done by an employee (in the strict sense) who is acting within the scope of their employment. Most of the time, unless you have an express, written assignment of copyrights, that outside developer you just paid tens of thousands of dollars to will own the software he just developed. And that’s in spite of what both parties may have intended all along. So, get an assignment, and get it in writing.”
Agreements with Former Employees
Steve Charkoudian, chair of Goodwin Procter’s Technology Transactions practice: “Founders or founding teams often neglect to review their employee agreements with former employers. These agreements may give former employers a claim to intellectual property that the founder or founding team is planning to use as a centerpiece of their startup. They often include provisions that say anything you do within the scope of your employment is owned by the company or that anything you do on company time that’s using company materials or machines in creating intellectual property or technology is owned by the company. The most egregious ones that I see include the basic provisions and then say that it’s presumed that anything that is developed within 3 months, 6 months, 9 months, etc. after you leave the company was presumed to have been developed while you worked at the company. So, as a founder or founding team, you really want to look at those agreements to make sure that any former employer doesn’t have a claim to the centerpiece of the technology that the startup was planning on owning.”
Ashley Dobbs, shareholder at Bean, Kinney & Korman suggests startups should:
- make an inventory of all their mission critical IP – not just patents, but copyrights, trademarks and trade secrets;
- make sure the IP is either created as a work for hire for the entity by an employee or under a written agreement, or that the rights are fully assigned to the entity in writing;
- file the necessary registrations for copyright, trademarks and patents; or
- take appropriate steps to protect and keep confidential those trade secrets (i.e., security systems, need-to-know access, employee and contractor non-disclosure agreements, etc.).
5. Entrepreneurs Don’t Take Advantage of ‘Track One’ Priority Examinations (For Faster Application Process)
Startups, in particular, are in a special position to jump ahead of the FIFO queue at the USPTO... - Aseet Patel, Banner Witcoff
Aseet Patel is a shareholder at law firm Banner & Witcoff: “Although they are trailblazers in their industries, too many startups acquiesce to the all-too-familiar patent application backlog at the U.S. Patent & Trademark Office. Especially in the software and Internet technology areas, the USPTO can take years before they pick up a newly-filed patent application for examination. Startups, in particular, are in a special position to jump ahead of the FIFO queue at the USPTO. Many startups qualify for the 50 percent discount afforded to small entities (or better yet, for the new 75 percent discount afforded to the newly created micro-entity status). With such steep discounts, for as little as about $1,000 to $2,000, a qualifying startup can request the USPTO’s Track One prioritized examination program. We’ve had great luck with Track One and have been able to obtain granted patents for clients within less than a year, and in one case, in only six months after filing. When time is of the essence and the next round of mezzanine financing is around the corner, don’t forgot to ask your patent attorney about Track One. It might just be the thing you need to get that patent granted faster and attract the venture capital that your startup needs.”
6. Entrepreneurs Don’t Use Confidentiality Agreements to Protect IP
Lacy Kolo, Ph.D., an associate at Patton Boggs, says: “Startups harm their intangible asset values when they do not use a confidentiality agreement. Because they disclosed their intellectual property to others, they can be estopped from obtaining patent protection, or asserting their IP is a trade secret down the road. All parties should sign a mutual non-disclosure agreement before any discussion on the IP occurs. If IP has already been disclosed, then the startup should make a detailed list of what was disclosed, so an IP attorney can determine if there are any limits on patent or trade secret protection.”
7. Entrepreneurs Don’t Always Select a Distinct and Strong Trademark
And finally, a reminder from G. Henry Welles, partner and chair of the intellectual property group at Best Best & Krieger LLP: “The biggest mistake entrepreneurs make is not taking the time to select, clear and protect trademarks for their businesses and products from the outset. A strong trademark is a valuable asset, and if a business owner inadvertently or intentionally uses a trademark belonging to an existing company, they could end up paying that company all of their profits earned from using that trademark. Entrepreneurs should select a trademark that is distinct and strong; it should not be merely descriptive of the product.”
What's on your list of IP mistakes for startups? Send us a note at email@example.com.