In the words of Mark Getty (‘Blood and Oil,’ The Economist, March 4, 2000): “Intellectual property is the oil of the 21st century. Look at the richest men a hundred years ago; they all made their money extracting natural resources or moving them around. All today’s richest men have made their money out of intellectual property.”
Intellectual Property (IP) plays a vital role when it comes to startups for the reason that a startup may put a lot of hard work and capital that it has invested and curated on the line, which could risk its competitiveness, and in many other cases, its existence as well. Intangible assets like patents and copyright are prone to be copied or stolen. Therefore, devising an appropriate strategy to manage IP is crucial.
Why is IP Relevant for Startups?
- It safeguards the core ideas upon which the startup is built.
- It helps to generate and maintain a competitive advantage.
- It helps protect and promote investment in R&D in terms of time as well as capital.
- It helps in generating and safeguarding the revenue of the startup.
- It attracts potential investors in the market.
- It generates and poses IP assets as collateral to secure investment.
-Factors on which IP Strategy Depends
Frequent Mistakes that Startups Make
Startups may fail to acknowledge the gravity of the impact that IP assets are capable of making. Such avoidance can cost heavily and can hamper the growth of the startup. These are the commonest mistakes that should be avoided:
- DIY Method: Startups may find the allocation of their resources difficult, and on their priority list, the formation of the IP strategy is probably not at the top. The Do-It-Yourself (DIY) method is by far the riskiest. Startups should consider employing qualified IP counselors to identify the needs and offer solutions, keeping in mind the objectives and capabilities of the company.
- Disorganized Form of Documents: Much too often, a startup gives little or no consideration as to how a pro-forma agreement stating the terms of a non-disclosure agreement defines ‘confidential information,’ along with what it includes, what it excludes, and its duration. Standardized forms rarely deliver the needed result/information, and this is where qualified legal counsel is necessary.
- Failing to Create and Optimize IP Strategy: Premature companies develop all kinds of plans like business plans to obtain investment capital, marketing plans, recruitment plans, and even search engine optimization strategies; what they may forget is their most important asset, including IP.
What are the Different Strategic Options One can Avail?
- Proactive Safeguarding of IP Portfolio: A startup should consider protecting all its IP assets, including trademarks, patents, copyright, to name a few, all alike. Such safeguarding should be extended irrespectively to all kinds of IP regardless of their strengths or weaknesses. Once all the Intellectual Property Rights (IPRs) are safeguarded, a strategy to exploit the same in each respective jurisdiction following the market and consumer response should be devised. If the startup wishes to maintain exclusivity only in one jurisdiction, regional strategies can also be devised. The building of a portfolio only based on R&D initiatives could be detrimental and costly; therefore, where it seems appropriate, collaborating and acquiring IP assets should be considered.
- Separation of Ideation and Work Space: The obligations stating the employment and employee relation should be explicit in the contract of employment to ensure the status of those inventions or creations that come into being while the employee is acting in the course of employment. Most companies and startups will requisition their employees to sign a Confidentiality and Invention Assignment Agreement wherein the employee takes cognizance and concurs that any new ideas and inventions emerging through the efforts of the employee related to the concerned business of the employer are owned fully by the employer.
- Claim Ownership: Many ideas are developed over brain-storming sessions, cafeterias, etc. Therefore, exchanging ideas for recreational purposes should translate into formal agreements, probably in the form of ‘pre-nuptial agreements’ among co-founders whenever it deems necessary. Co-founders of any IP asset should take the following into careful consideration:
- The percentage of sharing of revenues accruing out of the asset
- The percentage of ownership interest in the asset
- The rights and duties of each of the co-founders
- The mode of decision making concerning the asset; for instance, licensing related or assignment related decisions
- Conditions of using and circumstances of disposing of the said asset
- Consider Continuous Evaluation of IP Assets: Evaluation of assets helps validate and assess the actual value of the IP after performing rigorous IP due diligence of the assets. Technology startups, specifically, frequently ignore the value of their non-patent IP.
- Exercise Precautionary Measures while Utilizing Open Source Software: A common perception of open source software is that it is free for use, and absolute utilization of the software emanating from its use for commercial gains is indefinitely allowed. While open-source software may be an expedited way to move up the ladder, it may not allow commercial exploitation of the same. Therefore, not reading or ignoring the agreements or the terms of their use may lead to a suit for the breach of contractual terms impacting the startup’s pocket. Some specific open-source software programs require the object code developed by the startup utilizing the platform to be made open to public use as well. In such a case, the IP asset is lost.
- Litigation may not always be the Best Strategy: Engaging in lawsuits can be a costly affair, including a waste of a lot of potential time and company resources. The same can be diverted towards the development of the company since, in the initial years, it is the business that matters more than victory-losses as reputation building is at a preliminary stage. Therefore, if you feel the need to litigate, make sure that you consider the long-term view. Only litigate at the last resort or where the upside is very beneficial.
- Branding and Marketing: The star patents or the commercially viable IP assets should be utilized through suitable branding. This may enable building the goodwill of the brand. While branding, the appropriate use of symbols like TM, ®, and © should be carefully utilized as they may act as an apparent warning for infringing users or those who resort to practices like patent trolls.
- Third-party Use: If a startup wants to permit and leverage third parties to use its IP assets, the startup should put it in the form of a written license agreement. The licensing agreement should specify the duration of the license, who can utilize the IP asset, method of utilizing it, what they can use it for, how it can be terminated, and whether it can be sub-licensed to third parties. An explicit statement of anti-competitive practices should also be made. Therefore, if the entity has invested for something to be developed for your business, make sure you own or are appropriately licensed to use the IP. The same is particularly true when it comes to software; hence, make sure that the underlying copyright of critical codes are transferred to your business.