Patent Attorney and Founder
Launching a startup is a prospect that is bold, exciting, and potentially profitable—provided you put in the work and resources to get it there. Many entrepreneurs love the challenge of setting up something that is bigger than they are, and there’s nothing quite as rewarding as seeing your dream become a reality.
The sweet payoff of success is a pretty good bonus, too.
However, the path to entrepreneurial success isn’t easy. There are a dozen or so challenges that one can be faced with before, during, and after their launch. Ask any business owner; they’ve probably faced tons of physical, financial, social, and even political challenges to get to where they are today.
In this article, we’re going to discuss intellectual property strategies as well as cover a legal challenge that not a lot of startups recognize; the challenge of legally protecting their intellectual property (IP).
Why Protect Your IP?
As new ideas emerge, it is crucial that you keep the momentum going and capitalize on these ideas by developing them. However, for development to even begin, startup owners should recognize these ideas as valuable assets and protect them accordingly.
This is especially true for technology startups. Your technology assets should be a top priority.
Once a startup decides to raise funds, get acquired, or go public, its IP ownership will be heavily scrutinized. Any discrepancies or uncertainties can negatively affect funding or acquisition.
Intellectual Property Strategies
Consider All Possible IP Assets
IP assets—or Intellectual Property Assets—are defined as “intangible creations” of the human intellect. Anything created that has yet to have a physical, tangible form can be considered an IP asset. It’s not uncommon for startups to have a number of IP assets that they themselves don’t recognize. Unfortunately, this oversight could cost them a lot in potential resources. So one smart strategy for managing your startup is to recognize and consider all possible IP assets.
There are four in total:
- Patents
- Copyrights
- Trademarks
- Trade Secrets
A cost-effective approach to this would be figuring out which of your IP assets brings in the most value, and then figuring out—and implementing—the steps necessary to protect them.
A. Patents
What Does It Protect?
New inventions & new technology.
What are the Different Types?
- Utility Patent. A utility patent basically gives the inventor a 20-year leeway wherein no one else is legally allowed to make, use, sell, or import the patented subject matter.
- Design Patent. A design patent protects the visual or ornamental design applied to the functional product. Under this patent, no one else is legally allowed to implement the same design to their own product for a period of 15 years.
- Plant Patent. A plant patent protects inventions or discoveries of asexually produced plants for a term of 20 years.
Helpful Links:
- Blog Article: Utility Patent vs. Design Patent
- Blog Article: How to File a Non-Provisional Utility Patent Application
Important Things to Note:
- File Quickly. In the United State of America, it doesn’t matter who invented a product first. It only matters who filed first. The first-to-file patent system under America Invents Act applies to all patents filed March 16, 2013 and onwards. You also have one year to file a provisional patent application.
- Prepare to Wait. Patents typically take two or more years to issue, although it is possible to expedite the USPTO examination of the patent application for a fee.
- File Often. As your invention continues to develop, try to file a patent for each new feature or major change you make to it to ensure your product is completely protected.
Helpful Links:
- Blog Article: How to Patent an Idea
- Blog Article: How Much Does a Patent Cost
B. Copyrights
What Does It Protect?
Original artistic or literary works. These may also include surveys, web content, and software codes.
What are the Different Types?
Credited and Anonymous/Pseudonymous
- Credited Copyrights. For works that were created on or after January 1, 1978, a copyright protects the author’s artistic/literary work for their entire life, plus 70 more years after their death.
- Anonymous/Pseudonymous Copyrights. For works that were created on or after January 1, 1978, anonymous/pseudonymous copyrights protects the creation itself for:
- 95 years, starting from the date of its first publication, or
- 120 years, starting from when it was first created
Whichever one is earlier.
Important Things to Note:
- Immediate Protection. Unlike patents, copyrights take effect as soon as there is tangible work produced i.e., as soon as a programmer writes source code for a computer program or as soon as a songwriter composes the first couple verses of his new hit. This means that there’s no actual need to formally register the work with the US Copyright office.
- Registration Benefits. Should you choose to register your work for copyright protection, there are a number of benefits of copyright. You’ll have legal ownership over the artistic or literary work. You’ll also have the right to report an infringement.
C. Trademarks
What Does It Protect?
Words, designs, symbols, phrases, or any combination thereof used to identify the source of a commercial good and/or service mark.
What are the Different Types?
Trademark and Registered Federal Trademark.
- Trademark. Trademark protection happens once the mark is used in commerce i.e., when a small business starts branding its advertisements with a logo or when a startup sells soaps with their name and logo on the wrapping.
- Registered Federal Trademark. A registered federal trademark is basically a trademark that was registered with the USPTO (United States Patent and Trademark Office). This offers the trademark owner several benefits, such as the legal presumption of ownership nationwide and public notice of the registrant’s claim.
Helpful Links:
- Blog Article: How to Trademark a Name
- Blog Article: How Much Does a Trademark Cost
Important Things to Note:
- No Legal End Date. Trademarks have no official expiration date. As long as the mark is being used for commercial reasons, the trademark is legally in effect.
- Clearance Search Needed. In order to obtain a registered federal trademark, startup owners must conduct a comprehensive trademark clearance search to ensure that the mark/s they’re registering isn’t/aren’t claimed or do not infringe on another registrant’s mark.
D. Trade Secrets
What Does It Protect?
Trade secrets protect (1) any information not generally known to the public that derives economic value through its secrecy and (2) in which secrecy is maintained through reasonable efforts.
What are the Different Types?
Technical and business information counts as trade secrets. So some formulas, compilations, business plans, clients list, research notes, prototypes, and pricing information can be considered trade secrets.
Important Things to Note:
- No Expiration Date. Just like trademarks, trade secrets do not have a legal expiration date. As long as all parameters of what makes a “trade secret” are met, the information remains a trade secret.
- Fee-Free. Since trade secrets depend on secrecy, they do not need to be filed or registered. There are also no federal organizations or departments that would legally register a trade secret. This makes them cost-effective assets that many startups can leverage.
- NDAs. One way to ensure the protection of your trade secret is to have all associated or involved parties sign an NDA, or a Non-Disclosure Agreement. This document legally binds the signee and prevents them from disclosing any information shared with them under the parameters of the NDA. Do note, however, that an NDA may not be enough. Extra measures are necessary to ensure that your trade secrets stay guarded.
Helpful Links:
- Blog Article: Patents vs Trade Secrets
Identify Who Owns the IP
Now that you know what your intellectual property strategies are, you need to identify the owner or respective owners. In the case of multiple contributors—as is expected with startups—a clean, organized record of all participants should be kept.
Why is this important?
Because potential investors may want to verify ownership of all assets, and it can be difficult if genuine contributors or benefactors are overlooked. Issues may arise if founders, founder-employees, founder-contractors, employees, consultants, and third-party contractors or freelancers aren’t properly credited, cited, compensated, or informed.
Here are some potential ownership issues that may happen concerning different IP areas.
A. Patent Ownership
Employee, Not Employer
Patents don’t recognize the work made for hire doctrine. This means that if an employee develops a patentable subject matter, the employee legally owns the invention—not the employer. Even if the employer pays the employee’s full salary and the invention was developed using the company’s material and time, the employee will be considered the legal owner.
Exceptions
- If the employee developed the patentable matter under the specific direction of the employer, the employer owns the invention.
- In California, an employer cannot make an employee assign the invention to the employer if the employee developed the patentable matter using their own resources (i.e., time, materials, etc.). The exception to this is if the invention relates to the company’s business or is a result of any work performed by the employee for the employer.
Independent Contractor
When an independent contractor creates an invention, they have an ownership interest in any of the patent rights obtained in the invention—not the hiring company.
Exceptions
- If the company wants to own the rights, they’ll need to enter into an agreement with the contractor to assign any of the contractor’s rights in the invention to the company.
Helpful Links:
- Blog Article: Inventorship vs Ownership
- Blog Article: Can Multiple People Own a Patent
B. Copyright Ownership
Employer, Not Employee
Unlike patents, copyrights acknowledge the work made for hire doctrine. This means the employer owns the copyright developed by its employee even if there is no formal agreement in place.
Exceptions
The work for hire doctrine for copyrights will not apply if the work is made by an independent contractor. The exception to this rule is if there’s an existing written agreement that specifies the work created by the contractor is “specially ordered or commissioned” by the company and the work falls within one of the nine categories of works provided under the Copyright Act.
Employee vs. Independent Contractor
When it comes to copyrights, the role of “employee” and “employer” is classified by the courts. In the case of legal events (such as disputes or registration), the court will weigh the worker against certain qualifications to decide whether he/she qualifies as an employee or an independent contractor.
C. Trademarks Ownership
Dictated by Use
The trademark is owned by the one who uses the mark in commerce. Therefore, if a startup hires a graphic designer to design a logo, there should be an agreement in place that the company is the one who owns the logo.
Must be for Commerce
For the product to be considered a trademark, the company must use the logo in commerce. For added benefits, consider registering the logo with the USPTO.
D. Trade Secrets Ownership
Startup Owner vs. Employee
In most cases, the startup owner is typically considered the employer—and therefore the recognized owner of whatever information the employee generates. This is further supported by any or all of the following instances:
- The employee signs an agreement assigning all rights to the company
- The employer hires the employee to develop that information
- The information developed by the employee is within the scope their employment
California Labor Code
Ca. Labor Code § 2860 dictates that “[e]verything which an employee acquired by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer.”
Exceptions
Ca. Labor Code § 2860 does not apply if the person is an independent contractor. This could be true in many other states as well.
Best Practices
We highly recommend that a startup dedicates as many resources as it can to ensure all rights and IP ownership belong to the company.
Employees and independent contractors play an important role in a startup’s success. However, unless there are specific agreements or security measures in place that legally dictate otherwise, they may very well be granted ownership of the intellectual property they create using your sources.
It is therefore highly imperative that a startup correctly classifies its workers—either as an employee or an independent contractor—and requires them to sign an NDA or written agreement regarding the work they perform for the company.
Protect Your IP Assets (Best Intellectual Property Strategies)
As you may have guessed by now, IP assets are extremely valuable for any startup. Failure to protect them or secure rightful legal ownership could prove to be severely detrimental to your startup’s development. Here are the best intellectual property strategies to protecting your IP assets that we highly recommend.
A. Execute an IP Assignment Agreement
IP created or acquired by a founder and/or co-founder before the incorporation of the startup needs to be assigned to the company through a Technology Invention Assignment Agreement right after the corporation is formed. This is typically done as an exchange for the shares of common stock issued to them.
Any employee or independent contractor that the company hires afterwards will be required to sign an Employee or Consulting Assignment Agreement that will assign to the company any and all rights and interests in his or her work performed during the course of work or employment. An accompanying clear chain of title showing that the company owns the IP needs to be clearly established.
Scenario A. What if a startup engages an independent contractor to develop its technology but did not make the contractor assign their rights in the technology to the company? And when investors start showing interest in investing in the company, the contractor is still the legal owner of the technology?
Even if the startup owner is able to locate the contractor and get the rights assigned to the company, it may come at a steep price. The value of the rights may have increased along with the current company’s value.
Scenario B. As with Scenario A, but what if the contractor cannot be located?
If the IP directly relates to the core value of the company, failure to track down the contractor and transfer the rights may negatively impact acquisition and cancel any possibilities for funding. This is one of the most fundamental intellectual property strategies.
B. Communication is Key
One of the most important and often overlooked intellectual property strategies is communication. It is imperative for intellectual and property rights/ownership to be communicated as early and as clearly as possible to all employees and independent contractors. In the long run, resolving these types of issues from the very beginning rather than just dealing with them before the startup goes public, raises funds, or is acquired is always cheaper and far more cost-effective.
C. Review All Employee Agreements
This goes for all the agreements you may have previously entered with another party. It is crucial that you ensure no employment obligations are conflicting or jeopardizing the startup’s IP.
Scenario A. An assignment agreement may dictate that the employer owns any employee’s invention or creation that relates to the employer’s business regardless of where the employee works on it and whose resources he/she uses.
In this case, founders, employees, and contractors of the startup need to review what they have signed with their employer prior to putting their idea to work or joining the startup.
D. Document Everything
It’s a good practice to start documenting everything. Keep records of where ideas come from to help ensure that prior employers do not have any stake in the startup’s invention, and constantly review and update them as needed.
E. Execute NDAs (Non-Disclosure Agreements)
Execute an NDA for all founders, employees, and contractors. No exceptions. This is one of the actionable steps you can take to protect your trade secrets, patentable ideas, and other confidential information.
F. Review Third-Party Licensing Agreements
Ensure none of the terms of the agreement affect your startup’s IP ownership.
Many startups will license technology from a third party as a base to build their technology. Case in point; a lot of startups prefer to use open-source technology. If you plan to use these platforms, it is crucial that you review the licensing terms and agreements to ensure that you own anything you (or your employees) develop using that technology.
If a company intends to commercialize its technology, avoid using copyleft-style open source programs. Such programs are licensed under the condition that any derivative works from that open source technology will have to become licensed under the same open source license. Thus, it will render the new development open source as well, preventing the company from commercializing that technology.
Conclusion
To recap our intellectual property strategies guide here is what we covered:
Table of Contents
- Why Protect Your IP?
- Intellectual Property Strategies
- Consider All Possible IP Assets
- Identify Who Owns the IP
- Protect Your IP Assets (Best Strategies)
At the end of the day, these legal issues and potential disagreements should not discourage you from pushing through with your startup launch. There may be a lot of legal considerations to take into account, but the more detailed matters can easily be handled with the help of an experienced and licensed attorney.
What matters is that you have the knowledge, awareness, and foresight to protect what is rightfully yours (or your startups). These intellectual property strategies will help you be mindful of what to watch out for, what to prioritize, and what to act on when the time is right.
So what are you waiting for? Book a free consultation today!