You cannot sell or monetize what you do not own, and your startup will be dead in the water without revenue. What's plaguing your fledgling venture? Intellectual property (IP) problems. One in three new ventures have IP issues when they go to raise money, and investors steer clear of that level of business risk.
Now, you might be saying to yourself: “No sweat. I know I need to take care of the appropriate filings and registrations.” That's not where the IP problems lie, though. Instead, they occur during the overwhelming early stages, when founders take shortcuts that later rear their ugly heads during the most pivotal moments, like fundraising.
Before you protect your IP by filing for a [patent, trademark, or copyright], ensure you have gotten your IP bases covered. Read on to learn the most common, and most devastating, IP mistakes startups can commit.
1. You are an Employee of Another Company When You Start Your Project
Season two of HBO’s Silicon Valley showcases this very real IP ownership trap. In the show, mega-corporation Hooli sues startup Pied Piper for IP theft. Hooli employed the original Pied Piper co-founders and now claims that the two created their software using Hooli resources, with Hooli equipment, and on Hooli time.
Employment agreements spell out the rules for working on side ventures. Many companies encourage innovation among their employees as long as it does not compete with their core offerings. However, other agreements say that the company owns all products developed on company time and with company resources. Some, albeit old-school, companies say that they own every thought and, therefore, every resulting invention. What situation are you in? You won't know unless you read your agreements.
Toiling away on a secret invention for years only to discover that your employer has ownership would be venture-ending, not to mention soul crushing. It is wise to pay special attention if you work for a research facility or university, as those organizations often have rules that ensure they own all their employees’ IP.
Action item: Read your employment agreement and disclose your personal projects or inventions to your employer upfront to retain ownership. Not only is litigation expensive, time consuming, and painful, but it also will scare away investors.
2. You Split Up Without a Prenuptial
I have been the happy co-founder who did not think that it would all fall apart. But it did, and I am not alone. Founder splits happen all the time. Most founders know that working on a handshake is problematic, but having an agreement on how you work together is not enough. A buy-sell agreement for an inevitable breakup is crucial business protection.
Often, co-founders feel like there is no need for a fancy agreement until after they raise revenue or capital. However, savvy investors ask for co-founder agreements during the due diligence process. If co-founders split without a buy-sell agreement, it'll jeopardize the viability of the company, because it begs the question: who is exiting with what and for how much? It’s critical that the co-founder does not leave with the company’s money-making assets or IP.
One recent startup had a medical doctor refuse to put the IP into the company and therefore was able to take his product elsewhere when he did not like the fundraising progress. Another startup had the IP outside the entity because they filed patents before having an entity. When those co-founders had a disagreement, they lost years battling over patent ownership. Why such a long battle? In the US, patents are filed in all the individuals’ names and then they need to be filed under the entity’s name as well. Your ability to control and monetize your patented products can be compromised if you do not assign the patents to the company. A failure to assign means that each individual can separately sell or license the products. This may happen without any legal issues because the company does not have patent ownership.
Action item: Create a business entity, have written co-founder agreements with buy-sell provisions, and make sure all IP, not just patents, are in the entity’s name.
3. You Played Lawyer With Your Agreements and Contracts
One entrepreneur thought he would save a four-figure legal bill by using a contract he downloaded from the Internet. I am not referring to one of the many websites like a Rocket Lawyer or Orrick Forms that offer free templates with context and review. This CEO used a license agreement PDF that someone had posted online.
He may have saved a couple thousand dollars upfront, but he lost millions later. When he sat across from a potential acquirer during the due diligence process, the attorneys pointed out the flaw in his company. A paragraph in the agreement allowed his customers to freely license his technology to any other entity. It was a deal killer because he had lost control of his IP.
Action item: Use agreements for contractors, employees, suppliers, and licensing that are at the very least vetted, if not created, by professionals. Also, read thoroughly before you sign anything.
Ultimately, your most valuable assets are at risk unless you identify and protect them from day one. Startups have a challenging enough time creating products and gaining traction. Don’t cripple your venture by not owning your IP. Be aware of pitfalls, be thorough in everything, and know when to hire good legal help. These will help protect your IP and your business.