8 Start-up IP Mistakes that Scare Investors Off

8 Start-up IP Mistakes that Scare Investors Off

Startups make a lot of mistakes. Mistakes with their product and positioning are regrettable but expected (and even encouraged), as these are constantly revised and the first iteration of the product is rarely the same as the final. However, mistakes involving intellectual property are difficult to overcome and can even make or break a company.

Imagine applying for a loan on your property and telling your bank, “I don’t have the deed, and I don’t know where it is, but I’ve been living there for 5 years so you don’t need to worry.” Would they believe you? Probably not! That’s exactly what start-ups do when it comes to their most valuable asset — the technology. By not securing their own intellectual property, not knowing if they have been stepping over other’s intellectual property, and not filing patents in time, start-ups are asking angel investors, crowdfunding platforms, and venture capitalists to invest in a hollow company.

Entrepreneurs need to be very aware and careful with their intellectual property to ensure the health and future of their companies. And yet many of them make the same common mistakes that make the company unattractive and scares off potential investors. Mistakes like:

Mistake #1: Treating IP as Personal Property

For a founder, the “Big Idea” is a very personal object. You develop and validate the idea on your own time and, through your passions, turn it into a company. In order to protect these ideas, you file provisional patents in your name as an individual. But as the company grows larger, you might forget to reassign these patents to the company. Disagreements between founders can (and do) cripple the company if people leave still clutching the patents that are under their name. Had the patents been reassigned properly, this falling out wouldn’t have had such dire consequences.

The same thing applies to employees. Ideally, employees have to assign the intellectual property rights of any inventions and innovations they create for you to the company. This is usually a provision in an Employment Agreement. Otherwise, they will be able to walk away with those IPs and your company will no longer have access to that technology. Standard clauses make it into employment agreements, however, often companies forget to add provisions requiring the employees to disclose all patents filed by them during the course of their employment, regardless of the direct connection of the filed patent to a product made by the company. Investors will go through a company’s library of IPs and patents and see if there are any red flags for missing or unassigned patents.

Mistake #2: Using a Name with Trademark Issues

Catchy or memorable company names can give start-ups a leg up in their marketing and promotion, and many entrepreneurs place a lot of emphasis on finding the right one. However, jumping the gun on a name or slogan and not doing research can cause intellectual property problems down the road.

One of the most common mistakes start-ups make when creating a brand is infringing on another company’s trademark, either deliberately or accidentally. Being able to register a domain or corporate name isn’t the same thing as having the rights. To have the legal right to a trademark, a company has to be the first to use it in interstate commerce.

To avoid any brand or trademark issues, you need to do a search on the USPTO website and a web search for other companies with similar names or wordings. If the trademark is already in use, it’s probably best to move on — or at least consult a lawyer, if you’re not sure. Starting with a name that may cause legal issues is not the best start to the company.

Mistake #3: Making Investors Sign an NDA

As I mentioned before, entrepreneurs can be very protective of their ideas, to the point of requiring investors to sign a Non-Disclosure Agreement (NDA). While these do allow some form of legal protection, the other effects are so counter-productive that you’re better off without one.

For one thing, investors will simply not sign one. They speak to hundreds of entrepreneurs and investors over the course of their business. Quite a few of them will have ideas similar to yours. NDA’s prevent them from discussing them, even if the conversation would ultimately be beneficial for your business. Investors view NDA’s as a rookie’s tool, and will mark you as someone who doesn’t know how investors work — and therefore won’t be a good business partner.

If you really want to protect your intellectual property, patents are a much better way to do it. It’s more secure than an NDA and doesn’t hamper the investors (or you) in any way.

Mistake #4: Crowdfunding before Securing a Patent

Crowdfunding campaigns are an excellent tool for getting direct market feedback, raising capital, and establishing an early customer base. They’re becoming an increasingly viable way to fund products and launch businesses, and has even created a crowdfunding culture with its own ethics, dynamics, and best practices.

To create an impressionable crowdfunding campaign, many start-ups develop high class videos that go into the details of the company and exactly how the product works. Entrepreneurs believe that the more they disclose about the product, the better their funding prospects, and rightfully so. It does, however, carry significant risks if you don’t handle it correctly. There are two sides to this risk: trademarks, and intellectual property.

For trademarks, brand names and logos that haven’t been properly vetted could lead to possible trademark infringement issues — especially if the product is associated in some way with an existing brand. Launching your product to big public fanfare, only to get a cease-and-desist in mid-campaign, can be devastating to both your fundraising attempt and your reputation.

For patents, there is a significant risk of losing the ability to patent your invention at all. In the U.S., you need to file for a patent application within one year of your first public disclosure. If you don’t, the invention will be considered “dedicated to the public,” and you will no longer be able to patent it. You also risk other people beating you to the patent after seeing your campaign. And since the U.S. operates on a first-to-file basis, it’s perfectly possible to lose your patent to an opportunist. If the company’s vision was to expand to foreign countries and as such file for patent protection in respective foreign countries, most foreign countries have a absolute disclosure rule, which means that you loose the right to file a patent if you have disclosed if first in a public domain. A provisional utility patent application is the usual method of choice for startups who want to immediately move ahead with their crowdfunding campaign.

Mistake #5: Mishandling Moonlighters

Moonlighting is a common thing among entrepreneurs, who often need the security of a day job while working on their “real” project. But what if you’re on the other side of the coin, as an employer of this moonlighter? What if this moonlighter’s work at your start-up is in the same space as their other work at the other company? Often there is a misconception among moonlighters that if the work is not directly related to the company’s current products or if its not currently being pursued by the company, then its fair game and they don’t need to disclose this to the company — this is simply not true.

Company can have a right to the intellectual property they develop even if its not directly on point or not a current product. If its in a similar space which involves the skills and know-how you gained at the company then its possible then may have a claim to the technology.

As an employer, you need to vet this through very carefully such that you minimize any potential claims against your start-up from the moonlighter’s company.

On the flip-side, if your employee is consulting for others, then your employment agreement should require them to disclose the work and have it cleared by the start-up to ensure there are no conflicts of interest.
Catch these issues early, and you’ll be able to sidestep any ownership dispute issues which usually surface when your business becomes a success.

Mistake #6: Mistiming the Patent Application

The timing of a patent application can be just as important as the act of patenting itself. To revisit our real estate analogy earlier, you need to perfectly time the period when you buy your new house and sell the old one. Buy too early, and you’ll be saddled with cash flow problems. Buy too late, and you’ll have to scramble for a place to stay in the interim.

In terms of patent applications, hasty patent filings can result in half-baked and incomplete patent applications that either get rejected or only offer sub-optimal protection. Also, your money is inefficiently spent on unnecessary legal fees when the technology is not yet fully vetted through and ready for patenting.

Late applications, on the other hand, risks others filing a patent for your invention before you do. This is especially a risk for publicly crowdfunded projects and popular emerging technologies. Companies often file late because they want to save money on the aforementioned legal fees, or want to wait until they get the idea perfect, or even just plain forgetfulness. Rush to file patents days before release of product also results in missing some important solutions that you may have developed along the way which may be a valuable asset to the company.

Mistake #7: Not Doing Competitive Research

You do not want to spend your time, effort, and passion on an invention without first figuring out who else is doing it. Working in a vacuum often leads to intellectual property and trademark challenges later on. This could result in you being accused of “willful infringement” and exposes you to punitive damages. Not doing your homework could also obstruct your efforts at getting capital. Think about it: would you, as an investor, work with an entrepreneur who doesn’t know who his competition is or how others are solving the same problem? Not likely!

There are also positive benefits to doing your research: identifying similar products and technologies helps you shape the direction of your own, and helps you establish how you will approach the market. It’ll also allow you to determine whether your invention is unique enough to qualify for intellectual property protection — and, if not, what you can do to make it so.

Mistake #8: Underestimate the Value of Your IP

It may be hard to believe, after reading this article, but there are companies that don’t account for the value of their intellectual properties. Even mature companies develop their own IP and leave it “on the shelf”, as it were, ignored. Typically, CFOs of a start-up to mid-sized company puts a value on and tracks most of the company’s tangible and physical assets. But they don’t do the same for their intellectual properties.

Don’t make the same mistake. All of your ideas have value, whether in actual or potential dollar amounts. Investors put a lot of stock in intellectual property, and like companies that can produce them consistently. Do a regular and thorough review of any intellectual properties your company owns and develops, and file patents on them frequently. You may be surprised at what you discover.

Firasat Ali

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