STARTUPS NEED AN INTELLECTUAL PROPERTY STRATEGY
Updated: Aug 8, 2019
As IP represents a significant proportion of the value in a business, an IP strategy is critical to success. It provides a strong foundation for growth, investment, IPO and sale. Read about the key considerations for startups.
Intellectual property gives you the legal right to prevent others from stealing the intangible
assets at the core of your business. Your ability to protect and assert these rights can
determine the success or failure of your business, and so, this is taken seriously by
investors, who will want to see that you have a strategy to manage your intellectual
property assets. 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.”
STARTUPS AND INTELLECTUAL PROPERTY
Startups usually don’t have a significant asset base. They could be an individual with an
innovative idea who hasn’t begun to trade, or a small business, which has just started
operating. If you have founded a startup, it is ironically exactly this lack of assets that
makes it so critical you identify and protect the assets you do have, your “intellectual
assets.” This is because it’s often your intellectual assets that will differentiate you, deliver
your competitive advantage, and go on to drive revenue. Conversely, failure to identify and
protect your intellectual assets can mean your business fails, generally because someone
more established sees the business succeeding, and takes the essence of what is special
about it– your innovation.
Or it could be that you are inadvertently building your business around someone else’s intellectual assets, in which case they may simply require you to stop. How then do you protect your intellectual assets? The answer is, depending on the type of intellectual asset, it may be able to be protected as “intellectual property” (IP). This is the name for legally enforceable intellectual rights. There are lots of different types of IP: copyright, trademarks, patents, design rights, and trade secrets probably being the ones you hear mentioned most frequently. People will often say: “But the business doesn’t have any IP.” This shows a basic misunderstanding about what IP is– it also pre-supposes that IP, like a physical asset, is something you always need to consciously “make” or “purchase.”
The reality is that everyone reading this article will have brought IP into existence. While it’s true of some IP rights that you need to apply for a formal registration in each country where you use them, other types of IP rights arise automatically. They are in effect a natural by-product, brought into existence automatically as the founders of startups record their ideas, style their business livery, take their marketing photos, draws their designs, or write code for their apps. As soon as these acts happen, valuable and protectable IP rights (in these cases copyright works) come into existence. You have them, whether you know it or not. They arise whether you like it or not. This means, just as for your other assets, your bank account, your laptops, your premises– you should plan to manage them, make a record of them, and try not to lose them.
The challenge for founders of startups is that resources (financial and human) are generally limited, and so, hard decisions need to be made about how to allocate them. This makes it more critical that startups think about their IP strategy earlier, and be cleverer to keep their costs down. For example, by keeping the details of their innovation confidential, an inventor can protect it as a trade secret, and so, defer the costs of applying for a patent until the startup is funded. By checking the assignment provisions in their agreements with consultants, a founder can ensure the business owns the IP rights in the materials it pays for. Just because you pay for something to be developed does not mean you own it. Of course, the list of “easy if you plan for them” fixes goes on- formulating a clear and practical strategy to manage and protect your IP, and aligning this with your business plan is key.
A good IP strategy is based on the needs not only of the business in the present, but also provides a framework for protecting the business as it grows. It will put simple processes in place to identify a business’s IP as it is created, then capture it, and finally protect it. It will also help a business to take measures to check it isn’t infringing someone else’s IP. Protecting IP will mean different things to different businesses. It could mean protecting software, AI technology, furniture designs, or brands. It may involve preserving copyright and trade secrets, or perhaps registering patents, designs, domain names, or trademarks.
Most startups will not have the luxury of applying to protect all of their potentially registrable IP rights at the outset. Financial constraints will mean that difficult decisions will need to be made regarding which IP right or rights to prioritize. This is where a clear strategy comes into play. It enables a business to plan step by step, and budget sequentially. Where the budget is insufficient and hard decisions need to be made, so long as this is recognized at an early stage, strategies can be employed to limit, or delay, spend until the business develops.
COMMON PROBLEMS STARTUPS FACE WITH IP
Startups may range widely across market and product/ service sectors, but they tend to suffer from some similar, very basic, problems when it comes to IP. Who owns the IP? Ownership of IP assets is one of these. Often there is more than one founder collaborating to launch a startup. In addition, there may also be consultants retained to help with business processes, design logos, design websites, write code, carry out market research,
draft marketing materials, etc. Unless the underlying IP in what all these individuals create
is properly assigned, in writing and in the correct form, the startup company itself will not
own it, the rights will remain with the individuals.
The startup may not even be properly licensed to use the IP. This is despite paying for it. Software, in particular, can create problems. The software trail must be audited to see who is responsible for the code and the company needs the copyright. Should you disclose your IP? Accidental disclosure of trade secrets is another common problem. It is critical that you take steps to maintain secrecy until proper decisions are made: either to seek patent protection, to continue to protect by way of trade secret, or to disclose (so no-one else can claim a monopoly right).
You should also ensure that the employees and consultants who work for you don’t disclose your confidential information or trade secrets. Use confidentiality provisions in
contracts, keep valuable know-how, data, test results, and client lists physically secure.
Install robust date security systems. How do I let others use my business IP? If you want
to allow others to use your business IP, you should document this in a written license
Licensing your IP is a little like leasing out an apartment. You need to decide how long the license runs for, how it can be ended, who can use the IP, where they can use it, what they can use it for, and whether they can be forced to share it with other people. This article is only intended as an introduction, but hopefully it serves to illustrate the value of spending some time, and budgeting a little money, at an early stage, to formulate an IP strategy for your business to provide a strong foundation for future growth, expansion and investment, and potentially even an IPO or sale.
This article was first published in Entrepreneur magazine.