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Intellectual Property Awareness for Early Stage Companies
February 26, 2020

By Ryan O’Donnell

Reprinted with permission from the February 25, 2020 issue of The Legal Intelligencer ©2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Intellectual property (IP) is often the most critical asset for an early stage company.  Developing a strong, cost effective IP strategy and risk management strategy to avoid costly IP litigation can make the difference in a company’s survival.  Investors or potential acquisition entities are well-versed in the importance of a strong intellectual property portfolio and strategy, and typically value early stage companies on the strength of their IP rights.  It is essential to protect intellectual property at early stages in the company’s life cycle in order for any startup to be successful. However, many early stage companies face the dilemma of how to finance intellectual property on a tight budget, while also maximizing their IP protection and being diligent to avoid third party intellectual property. This article will describe some basic, cost-effective practices for early stage companies to protect essential intellectual property assets and develop strategies avoid IP disputes.

IP Agreements

Individuals in early stage companies often informally collaborate when discussing a company’s direction.  At the early stages, it is often the case that there are no written agreements among the individuals, some of which are employed by third party entities and may have obligations to assign their inventions or improvements to their current third party employer.  Even founders or employees of the company may have different understandings over IP ownership and assignment obligations during the start-up phase.  Without any written agreements in place, a company’s inventions, improvements, or know-how can end up being owned, or partially owned, by individuals or a separate company.

In order to minimize this risk, a company should have a policy of requiring its founders, employees, consultants, or other third parties to execute written IP ownership and non-disclosure agreements.  It is critical that a company enter such agreements prior to the initiation of any employment, collaboration, or services performed for or on behalf of the company, to avoid any subsequent disputes. 

IP ownership agreements typically require that all IP that an individual creates or develops for or on behalf of a company, or derived from company’s information, is owned by such company.  Such ownership agreements should have express language requiring “assignment” of the intellectual property to the company, and the individuals involved in creating or developing the IP will do what is necessary to perfect the IP rights.  Non-disclosure agreements typically contain restrictions on the disclosure and use of a company’s confidential or proprietary information.

Cost Effective Intellectual Property Strategies

For an early stage company, the quality of the company’s intellectual property can be more important than the number of IP assets.  Particularly with start-up budgets, careful consideration should be given to how patents, trademarks, copyrights and/or trade secrets can protect the company’s core technology and whether there is any competitive advantage to filing such IP, such as creating roadblocks for competitors, creating new streams of revenue from licensing, or making the company attractive to third party investors/acquisitions.  Below are some exemplary tips for cost-effective, strategic patent application filings.

As a result of global market potential, patent applications are typically filed in multiple countries, which drastically increases IP costs.  In order to minimize the risk of investing tens to hundreds of thousands of dollars in world-wide patent applications for a technology that may ultimately be found unpatenable, a prior art search is recommended prior to getting too far into the patent application process.  A company will be able to make a more informed decision on investing in patent applications after analyzing relevant prior art.  A prior art search also allows a company to determine the scope of the improvement over known technology and decide whether that improvement is worth investing in, or whether resources or better spent in a design around effort.    

Concurrently with performing a prior art search, a patent applicant may choose to file a provisional patent application in the United States in order to preserve a filing date and delay the time required to file a U.S. non-provisional patent application or foreign patent applications up to one year.  A provisional application is typically less costly than a regular, U.S. non-provisional patent application, as it does not undergo examination and does not have the same formal application requirements as a non-provisional patent application.  The one year term provided by a provisional application may be beneficial to a start-up company looking for an investor prior to incurring the costs of filing a U.S. non-provisional or foreign patent application(s).

After a decision is made to pursue foreign patent protection, a company has the option to file patent applications directly in the countries of their choosing, or to file a single international patent application under the Patent Cooperation Treaty (PCT).  The PCT is an international patent law treaty that provides a unified procedure for pursuing patent protection in its member countries, which include nearly all major countries.  A PCT application is not a request that a patent be granted, but rather it establishes a patent application filing date in its member countries.  An applicant filing a PCT Application is given 30 months from the PCT application’s earliest priority date to decide whether to continue to pursue the application in individual countries.  A benefit to filing the PCT application is that an international search authority will examine the international patent application and provide a search report and written opinion on the patentability of the invention.  This provides the patent applicant the benefit of a patent examination before taking the next, more costly step, of deciding which individual countries to pursue patent protection in. 

Develop A Written IP Strategy

The business plan for many startups often relies on the strength and scope of its intellectual property rights, assessments of the market and competitors, and written procedures to attempt to avoid costly IP litigation, which can easily exceed $1M.  In order for a collaborator, investor, or acquiring entity to invest resources or capital in a startup company, it is often critical that the business have a well-developed IP strategy that minimizes risk and protects the company’s desired market.

A startup’s IP strategy must be aligned with the company’s budget, business objectives, and goals.  An IP strategy should provide a comprehensive plan for when and how the company will pursue and protect its intellectual property, how the company will fund such strategy, and the company’s risk management strategy to avoid third party intellectual property rights. An IP strategy should be directed to creating value, reducing risk, and opening the door to further business opportunities.  Some considerations for developing an IP strategy include:

  • Creating procedures to identify, document, and keep secret all inventions, proprietary information, works and other information that can be legally protected.
  • Projecting a budget for IP protection over several years or at identified milestones.
  • Protecting core technology with patents, copyrights, or trade secret protection.
  • Identifying markets/countries that are critical for the company’s current business and growth.
  • Identifying major competitors in the technology space and performing searches to determine the scope and remaining life of any competitor patents.
  • Consideration of opportunities for joint ventures or licensing within the technology field.

To summarize, it is critical to have an intellectual property strategy from the outset that documents company policies, budgets, core technologies, desired market, and minimizes risk. Because a strong intellectual property strategy often coincides with a startup company’s success, the business should have a well thought-out, written IP strategy in place.  Such an IP strategy can take advantage of the cost-saving or delayed cost techniques discussed herein to preserve IP rights and leaves the option to pursue bigger IP milestones in the future.