There are few things more exciting in law practice than seeing a startup take shape and come to market. From the initial meeting of the principals and company formation to actual launch of products and services, the process of bringing a startup to life and watching it evolve never gets old. Inevitably, every startup faces hurdles… and those hurdles do not exclude the creation and protection of intellectual property assets. In fact, almost all of the startups I have had the pleasure to counsel over the last 20+ years have had challenges regarding their IP and how to protect and best leverage it in the marketplace. What is even more surprising is that there is a specific step that most of these startups ignored regarding their IP that caused headaches at some point along the road to market (and beyond)… and it is not what you may think.
The value of IP in a startup cannot be ignored. It is axiomatic that technology startups are the most attuned to the value of IP to their business — some form of technology is usually the backbone of their business model. That said, you would be surprised how often most startups generally misjudge the nature of their IP, or otherwise get so focused on bringing their products or services to market that they lose sight of foundational IP. None of the foregoing, however, reflect the most prevalent mistake made by startups in executing their business plan. So… what is he biggest mistake they make regarding their IP? Without fail, the short answer is the failure to develop (or execute on) a well-thought intellectual property plan.
Why does this happen? Startups commonly develop all kinds of plans, including but not limited to business plans outlining the nature of the business and appropriate milestones to garner investment capital to marketing plans for appropriate advertising to facilitate market penetration. So why do they commonly ignore the plan underlying some of the company’s most valuable assets? From what I have witnessed, three main reasons for this oversight come to bear. First, most startups are running at such a high speed to market that they take a “shotgun” approach to IP rights without prioritizing the value of the IP assets. In essence, the principals are so busy creating a product and bringing it to market that they fail to take the necessary steps to identify IP assets and how to best protect them. This is a piecemeal approach to IP that almost always costs far more than anticipated to protect much less than expected.
Second (and more common), startups can hyper-focus on one type of IP without looking at how all the rights work together. For example, an inventor may believe he or she has “cracked the code” for a new technology and focus entirely on the patentable subject matter with her business partners without protecting the proprietary information and know how that may be equally important to executing the technology in the marketplace (or preventing a design-around of claims of any eventual issued patent(s)). In fact, this “hyper-focus” can lead to significant “bleeding” of IP rights by not ensuring that such proprietary information and know-how is properly contained through appropriate documentation and company policies.
Third, some companies completely ignore appropriate IP protections until it is too late. Sadly, this last reason is more common than you may think, requiring significant remediation of the IP portfolio (where possible) and allocation of precious monetary capital that is better served in building the company rather than repairing the damage. Such corrective measures can not only be expensive but may not be enough to protect the company. I have too often witnessed the public disclosure of patentable subject matter prior to filing a patent application that can limit (if not destroy) patent rights, as well as the failure to assign copyrights to seminal software created by independent contractors without the proper written agreements in place. Moreover, the failure to create an IP roadmap at the outset can expose the company to potential third-party infringement risk. Worse, those startups that have issued private securities to obtain investment capital most likely have made representations about IP protection that they may not be living up to… creating even more risk. Simply put, lacking a plan for protecting IP can significantly impact not only short-term gain but the long-term prognosis for a startup company’s success.
So what should a startup do to avoid this quagmire? The answer is not only simple, but remarkably cost-effective — take the time up-front with IP counsel to outline the existing and contemplated IP assets of the company and a plan of action to acquire and protect them. By doing so, the startup can reap significant value from the IP assets being created, as well as shield the company from potential third-party infringement exposure. Identifying the existing and contemplated IP of the company helps develop a game plan for allocation of resources and capital to develop, maintain and protect those assets. Once identified, the startup can then cross-reference the IP to the business plan and product development plans to help prioritize protections and tasks that can ensure the best allocation of resources to protecting and leveraging the IP capital. Moreover, this process helps identify potential areas of infringement risk that, if left unaddressed, can lead to third-party claims that can hurt (if not kill) a nascent company.
Successful startups are not just created — they are built on a foundation that includes IP capital. Any entrepreneur will tell you that the investment of time and money in a startup is always more than they originally anticipated… and then some. Building a successful company from scratch is hard enough — startups shouldn’t make it harder by trying to lay the foundation for it with both hands tied behind their back. Take the time to make an IP plan… your partners and investors will thank you for it.
Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at firstname.lastname@example.org.