Startup companies often face significant risk Intellectual Property (IP) risk on their path to success.
By Emily Miao and Bryan G. Helwig
All businesses have IP in the form of patents, trademarks, copyrights and trade secrets.[1] Identification of IP assets is critical as investors conduct due diligence to evaluate the strength and valuation of a startup’s IP portfolio.[2] Importantly, a startup should be cognizant of the following common IP mistakes.[3]
Underestimating IP Importance and Failure to Create an IP Plan
The IP plan should identify existing and future IP assets; provide a strategy for maintaining and protecting the IP assets; outline a strategy for conducting freedom-to-operate (FTO) searches; and establish an IP-related budget. The IP plan should be continually reviewed and cross referenced against the company’s business plan and product development.
Not Establishing Confidentiality Protections
Startups should be aware that public disclosure of an invention without IP protection can severely limit patent rights. If disclosure is necessary, a provisional patent application should be filed, a Non-Disclosure Agreement (NDA) should be in place, and/or the information disclosed limited to generalities.
Failure to Establish Clear IP Ownership by Startup
Failure to establish IP ownership rights can be a deal breaker in an investor-based due diligence analysis. Ownership issues can be averted if addressed early, even before the incorporation of the startup.
Importantly, a startup founder must be keenly aware of their current employment agreement, when working for a third-party employer while developing the startup. Furthermore, the use of company time, personnel and resources to develop startup related projects, without the employer’s agreement, should be avoided.
In general, IP rights belong to the creator absent any agreement to the contrary. Thus, when multiple stakeholders are involved, well-crafted written assignment agreements are imperative. In the event co-founders are involved in IP development, a founder agreement can help prevent future ownership disputes.
Startups often misconceive that contractors automatically assign the startup ownership rights to the IP created. As a safeguard, all contractors should be required to enter “work-for-hire” and assignment agreements. Startup employees should sign confidentiality and invention assignment agreements, which are especially important when employee leaves the company.
Failure to Identify Third Party IP Rights
IP commercialization can be blocked by a competitor who holds a patented technology incorporated within a product. Thus, startups, should consider a “freedom to operate” search and analysis of litigation risks of launching any product or service covered by any third party patent.
Using Poorly Drafted IP-Related Agreements or No Agreements at all
Template-based IP agreements pulled from the internet often fail to include adequate protection for the startup’s IP. Thus, when using IP-related agreement templates or prior to signing any agreements, the startup should consult an IP professional to review such agreements.
Conclusion
The process of bringing a new startup business to life to launching new products to the marketplace can be an exciting time. However, it is imperative that the startup take adequate steps to protect all their IP to avoid future disasters.
[1] For additional resources for learning about the difference between patents, trademarks, and copyrights, see Basic Facts: Trademarks, Patents, and Copyrights (Apr. 27, 2017), https://www.uspto.gov/learning-and-resources/uspto-videos/trademarks/basic-facts-trademarks-patents-and-copyrights.
[2] For a review of how venture capitalists view the importance of IP, see Mary Juetten, Do Venture Capitalists Care About Intellectual Property?, Forbes (Aug. 11, 2015), https://www.forbes.com/sites/maryjuetten/2015/08/11/do-venture-capitalists-care-about-intellectual-property/#45ce28195b87.
[3] Emily Miao and Bryan G. Helwig, Avoiding Common IP pitfalls: What Every Startup Needs to Know (Summer 2018) https://www.mbhb.com/intelligence/snippets/avoiding-common-ip-pitfalls-what-every-startup-needs-to-know
Emily Miao, Ph.D. is a partner with McDonnell Boehnen Hulbert & Berghoff LLP and serves as Chair of the firm’s Startups & Entrepreneurs Practice Group. Bryan G. Helwig is an associate with McDonnell Boehnen Hulbert & Berghoff LLP.
Startup stock photo by Olivier Le Moal/Shutterstock
