How Not to Lose the IP War: A Primer for Early-Stage Startups
What are the three primary risks startups face when it comes to protecting intellectual property?
Simply put, Intellectual Property (IP) is an asset, and thanks to its value, tech companies like Amazon and Apple rank high among the world’s corporate titans. In fact, an estimated $20–25 trillion of the S&P 500’s market cap is represented by IP and other intangible assets. The dust from the 16-month federal antitrust investigation into Amazon, Apple, and Facebook had barely settled when new discussions emerged among regulators about how to keep abreast of the constant threat these monopolies pose.
It’s not a leap to understand how large and cash-rich companies often find litigation (and sometimes acquisition) more cost-effective than investing in R&D to bring new products to market. Companies of all sizes leverage IP to gain a competitive advantage as well as boost profit potential and valuations. Startups, which typically have little else in the way of assets, should heed the wake-up call to protect their IP as a matter of survival.
Intellectual property encompasses work that can be categorized, in general, as creations of the mind, such as inventions, software coding and design, creative design, symbols and more.
Vouch’s co-founder and CEO Sam Hodges cautions early-stage founders to,
Be aware of three primary risks that startups face when it comes to your intellectual property: assignment of invention, trademark strategy, and missed opportunities to build and expand your company’s IP.”
It’s important to understand these threats and develop a proactive strategic plan to shield your ideas and work.
To clarify, I am not a lawyer and I am not offering legal or business advice here; I am a journalist sharing the words of experts who have worked in the trenches of the IP war. Read on to learn more.
Understand the Three Primary Risks
Assignment of invention (AOI) clauses give the rights of all inventions and intellectual property developed in an employee's (or founder’s) tenure with that company to the company itself. Co-founders and employees of early-stage companies commonly work together on code or other core IP that forms the basis of the company’s product.
But what happens when someone decides to leave?
Lack of AOIs or clarity around them can leave open the chance for disputes between founders, employees, and even other financial stakeholders.
“Building—and protecting—your trademarks are a critical part of building a strong brand. Early-on, it’s critical to find open space where you can build your own mark as a company, and equally crucial to defend this space as your company grows. If you fail to do this, you run the risk that someone can come and displace you from your brand space, with unfortunate results.” Hodges explains.
It’s important to remember that trademarks can be registered any time before, during, or after a product launch—even if one proves to be commercially successful. However, it's best to work to incorporate trademarks, including your domain name, into your legal and brand development process as early as possible.
Unless you can see the scope of your IP right away, you can run into IP problems later that you’re woefully unprepared to face—whether you are infringing on another company’s IP, or whether you’re the party being infringed upon.
Startups may also struggle to maintain control over IP when dealing with contractors, external vendors, or partners. For example, founders may end up agreeing to a broad indemnification obligation and unlimited liability to close the deal. This action can expose your company to the risk of competitive attacks, such as a larger company taking your idea and running it into the ground.
Gina M. Marek, Partner in the Licensing, Strategic Partnering and Commercial Transactions Practice at the Gunderson Dettmer law firm says, "You can probably explain to your potential investor: that was the cost of getting the deal done.”
Don’t give away the store, however.
Granting exclusivity in your IP, agreeing to source code escrows that are easily trigger-able, and other provisions that either devalue your core technology or put it at risk aren’t readily explained away,” says Marek.
When employees, customers, and investors become aware that you have failed to guard your company against these risks, they could lose trust in you as a leader and in your business. These sentiments could have drastic implications for brand reputation.
Mitigate Risks with a Strategic IP Protection Plan
Good news: founders have many options for avoiding or lessening the impact of risks to their intellectual property, and patent filings are a popular starting point. Experts often recommend taking a strategic approach that makes sense for your business—where it is and where it is headed. Make sure you understand the tools at your disposal.
“If you are in a deep tech business, such as quantum computing,” says VC Ben Narasin, a Venture Partner at the venture firm NEA, and seed-fund founder of Tenacity Venture Capital, “protecting your IP would be super crucial.” In other use cases, however, such as for software or a digital marketplace, patents may be unnecessary or challenging to obtain. Before committing substantial resources, evaluate your protection needs.
“Ask yourself: why am I getting this patent?” says Marek. “Is it because I actually see a need for it to protect my competitive edge in my industry, or is it because I feel like I have to ‘check a box’ to look like I’m taking this startup thing seriously?”
Do a full trademark search early as possible and before you make major investments in launching, advertising, and promoting new trademarks. Remember to look for slightly variant registrations (i.e., different name spellings or synonyms) and search beyond the state or jurisdiction in which your company is incorporated. This can be a time-consuming process but taking shortcuts can cost you much more.
“It’s not a big deal to change a product name before you have any customers; it’s a much bigger deal to change the name once you’ve gotten traction,” says Marek.
According to the National Law Review, “Like trademarks, copyright registration is optional. As soon as a work is written or recorded or otherwise made ‘tangible,’ it is considered to be copyrighted. US law provides various exclusive rights to copyright owners, including the rights to reproduce the work, prepare derivative works, and distribute copies, irrespective of registration.”
It’s also a best practice to think through how your startup can take steps to receive the rights to work created by contractors, freelancers, and employees, and use specific language in your employee agreements that address ownership of copyrightable works.
While patent filings can be expensive and time-consuming, investing in legally tight and practical employment agreements that are tailored to the needs of your business can be much more cost-effective, especially in the early days of your business.
A well worded NDA can act as a material source of protection,” says Narasin. “It's much easier to win (with one) if somebody wrongs you.”
When NDAs are used properly, they can help protect against stealing business secrets, another valuable form of intellectual property. Narasin says, “Protection for business secrets can be longer-lived than patents.” Even if a former employee or associate learns your company’s “secret formula,” they could be legally barred from using it.
No matter which tools you decide to use, start an open dialogue with a lawyer experienced in working with startups, and work with them to understand how each IP protection can fit with your product and go-to-market strategy—both nationally and globally. Taking the DIY route may seem to save you money upfront but it may cost more in litigation and lost opportunities.
“Your investor isn’t going to accept ‘but I Googled it!’ as an explanation of how you ended up shooting yourself in the foot on IP protection,” Marek says.
“Much of the ideas around business,” says Narasin, “are not protectable via patent”—a fact of reality that is essential to recognize as early as possible. And not every solution for protection needs to involve hefty legal fees; you have choices, depending on your industry and business model.
For starters, invest in adequate cyber security. Cyberattacks can threaten your data and code, and in the era of digital businesses and remote work, these risks drastically increase. Lastly, invest in comprehensive insurance. Whether facing IP theft, a cyberattack, or an employment and invention dispute, the right insurance can help protect your business from costly incidents.
Be proactive and strategically map out what makes sense for your business. Learn the basics of trademarks, patents, and NDAs and when these tools are most appropriate for use. Regardless of whether filing a patent ends up being a component of your IP strategy, educate and prepare yourself to protect what you are building.