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.