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

Crowdfunding challenges: How technology startups should overcome pitfalls and attract investors


Crowdfunding has emerged as the vital lifeline for startups in recent years. According to Forbes, it is on the verge of overtaking funding provided through Venture Capital. It typically involves raising money for a business venture or product through several benefactors or patrons via an online crowdfunding platform such as Crowdfunder, Indiegogo, and Kickstarter.

These benefactors or patrons, which are essentially buyers of the product, provide funds for development of the product in exchange for receiving the product at a future date at some discounted price. The entire process involves certain rules and steps, which vary across different platforms. It is not as simple as floating your product or idea on a platform and expect buyers to flock in to fund it.

A savvy startup knows what it takes to convince a benefactor — At a minimum, you would need to provide detailed information on the product, company and team, and exceptional use of marketing videos and collateral to impress prospective patrons and make them understand the concept easily. The problem however arises as to how much information regarding the product or idea can be divulged without jeopardizing the intellectual property (IP) of the product.

While patrons need in-depth information to understand and feel comfortable enough to provide funding support, a startup should also exercise the right measures including, filing provisional or non-provisional patents before going for crowdfunding. The provisional route, which is basically a 1-year option to file a full patent later, is of lower legal cost and of significance to startups strapped on cash.

Sprucing up the barriers

As far as technology startups are concerned, the crowdfunding campaign is their first public investment process, as any other investments are made personally or via family and friends. As such, there exist strong possibilities of welcoming Angel and Series A investors and even a Venture round subsequently. Although crowdfunding patrons may be more forgiving, the subsequent investors will analyze several factors, including, strategy and principles used by the company in raising crowdfunding, and preservation of IP, including any barriers to entry that may have been lost during crowdfunding and early growth stages of the company.

Barrier to entry is given more importance, as when startups resort to public disclosure ignoring the patentability of the product; they lose the advantage an IP could bring them. In short, investors look at what measures a tech startup had in place for investment protection before going public. If they failed to take any protective measures, savvy investors may draw negative conclusions about the team, thereby impacting their future rounds of funding, or at a minimum, result in a decreased valuation.

Winning the patent race

As of March16, 2013, according to America Invents Act, the Patent system in the U.S. had changed from a ‘first to invent’ system to a ‘first inventor to file’ system. Prior to this, inventors had some grace period to attract the needed funding before application for patent was filed, giving the invention date more importance, instead of filing date.

With the new patent act, an inventor who had the presence of mind to file the application first gains more. An inventor now stands the risk of losing his concept to others, when he discloses the details in his crowdfunding campaign without protecting it first. The loss of IP rights may be incurred by others rushing to file the patent or developing either an enhancement or a work around the idea disclosed in the crowdfunding campaign.

Albeit it will come with expensive legal costs, you may still have some options to prove earlier invention date and retain your rights in cases where others copy the exact idea from your crowdfunding campaign and rush to file a patent in U.S.

Protecting future product revisions and enhancements

In current times where changes in technology occur at a rapid pace, it is important for a startup to envision a roadmap which provides additional enhancements, revisions, and additional capability to prevent the product from becoming stagnant or obsolete over time. One of the most common questions asked by savvy investors is how the startup plans to grow their product offering over time. As such, it is not only important to contemplate IP protection for the current idea, but also protect your future product growth.

A disclosure in your crowdfunding campaign may affect growth of your product in several ways. In one instance, instead of filing on the exact idea, if third parties viewing your crowdfunding campaign file a patent on an enhancement or a work around that is beyond your exact idea, then it may be difficult even with legal expenses to claim the rights to those enhancements. Since a patent includes claims that protect the exact idea as well as broader claims that cover enhancements and work arounds, had a patent been filed prior to the crowdfunding campaign, the startup would have the benefit of claiming the enhancements and preventing others from developing reasonable enhancements and work arounds that would now be lost to public without such protection.

In another instance, even if a third party does not file a patent on the enhancements, they may still create prior art preventing you from filing your own patent and gaining a competitive advantage. As you may know, once an inventor puts forward his idea for perusal on a crowdfunding platform, it starts a clock to file a patent. Referred to as grace period (which is the time allowed to file for patent from date of public disclosure), the period differs based on the country. In U.S., the investors get one-year grace period to file for a patent once it’s disclosed to public. Under the new America Invents Act, this grace period comes with several conditions, which if not satisfied, may result in inability to file a patent subsequently. For example, if a third-party viewing your campaign decides to publish a paper describing a further enhancement on your idea, then that publication would serve as prior art preventing you from obtaining a patent as well as adding that enhancement to your product.

Disclosure without affecting expansion to foreign countries

Your crowdfunding campaign may also have foreign implications. Consider this –startup X does a crowdfunding campaign in U.S. without filing patent prior to the campaign. Startup X is cash strapped and decides to focus their sales only in U.S. They believe expansion to foreign markets as a far stretch at this early stage and decide that they will deal with it over time. The crowdfunding campaign becomes a big hit and attracts both wanted and unwanted attention from copycats around the world. They may still have limited options in U.S. to file a patent and preserve their competitive advantage (which may come at a higher cost than if they had filed prior to the crowdfunding campaign); however, the startup’s public disclosure, followed by actions of foreign third parties viewing their campaign, could result in loss of their foreign IP potential altogether. This is because several countries follow an absolute novelty system, which further penalizes public disclosure, i.e., you may have lost your IP rights in such foreign countries forever. As such, to preserve U.S. right and potential growth into foreign countries, Inventors would be safer when they file a patent prior to raising funds publicly.

Leveraging your brand

A properly run crowdfunding campaign allows your brand to be seen by thousands, if not millions, of people around the world. Protecting this brand, especially after gaining high visibility, is of vital importance. Startups often secure a domain name but forget to protect their key brand names through trademarks. As you may know, trademarks are the proper vehicle to protect your branding, not domain names, which are simply an internet address.

Publicity that invites undesired attention

IP protection consists of two key parts, namely protecting your idea with a patent and ensuring it doesn’t impinge on the IP of someone else. While startups take care of the former task properly, they just ignore the latter. To prevent stumbling into the IP of another, which is a bigger problem, an inventor needs to do a meticulous Patent or Freedom to Operate Search, to minimize the probability of it affecting the IP of any other company. Additionally, a statement from an expert patent attorney to clear the way is one strategy that limits willful damages, if ever found to infringe in the future. This legal assistance clears the way more effectively and boosts the benefits manifold.

Normally startups just file for a patent and proceed with the development and other part of the product cycle. But with crowdfunding, an inventor discloses the monetary potential and this brings unwanted attention, which the inventor can well do without. Hence, filing of patent, performing some level of patent search, and obtaining of a legal opinion prior to crowdfunding are measures an inventor needs to perform with care and precision to attract the desired investment.

While it is good to be cost conscious and have a low burn rate prior to funding, saving on critical and foundational blocks, such as IP protection and patent clearance, could be a game ender, especially if you run into the IP of a bigger company with deeper pockets.

Firasat Ali
Firasat Ali (Author & Patent Attorney)

Firasat is a partner at Creso Legal LLC. Creso is a boutique law firm specializing in Intellectual Property (Patents, Trademarks, and Copyrights) and Corporate law. More information about the firm can be found at

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