These topics deal with the intellectual property issues that every company needs to think about to ensure its hard work, technology, brand, ideas, and products are protected. This FAQ goes over the basics of intellectual property, including patents, trade secrets, trademarks, confidentiality and non-compete agreements, inventions and the question of “who” invented them and who owns them, and how to pitch to investors without giving away your secrets.
What is Intellectual Property?
Companies need a lot of things to be scalable: a plausible business model, a practical way to get the solution to the customer, a sustainable competitive advantage, a good network, and strong marketing. Intellectual Property (IP) is another important asset that successful start-ups use to scale and generate outsized profitability.
Intellectual property is an important asset of almost every successful company. IP can take many forms, including patents (e.g. a patent on drug or device); trade secrets (e.g. the formula for Coke); copyrights (e.g. software code); and trademarks (e.g. the Venture Best moniker). The common feature of all of these kinds of IP is that they are proprietary property, meaning they are owned by a person or entity who has the exclusive right to the IP, and no one else can copy or use it without the owner’s permission, for a defined period of time.
Like any other asset, IP assets can be lost if the owner does not take appropriate steps to protect them. Further, maximizing the value of IP assets is almost always a function of developing, evolving, and executing an IP strategy. Collecting IP for its own sake isn’t usually an efficient business strategy, and your IP strategy should align with your business strategy. You should think about investments in IP strategically, just as you think about investments in other critical areas of your business.
As a growth mechanism, IP can attract and demonstrate credibility to investors, employees, and the paying public. IP can also serve as a way to disrupt a market, act as a revenue generator (e.g., in the form of license fees), protect your research and development investment, and be a cornerstone for a technology portfolio for your company that makes it more attractive to investors or in an exit transaction. Moreover, IP can help your business grow by being an important catalyst for B2B collaboration, a manufacturing or market alliance, or for maximizing your marketing by focusing on how you are different and better than your competitors. As a defense mechanism, IP can be a disruptor to what competitors may be doing, product or market-wise, and can play a significant role in mitigating conflict with a competitor by having a portfolio that “scares” your competitor in a way that hopefully minimizes your overall risk.
In general, try to make strategic IP decisions early. Decide how your concept or idea may be protected, and protect it in as many ways as financially possible. You’ll be happy you have IP protection in place when an investor reaches out. Also, use non-disclosure agreements to protect your IP whenever possible, and review your agreements (e.g., material transfer agreements, research/laboratory agreements, etc.) carefully. Lastly, be aware of what competitors are doing, as it can make or break what you want to do.
What do I need to know about Patents?
Patents are an important form of IP around which many start-up companies build their business. A patent is a federal grant of an exclusionary right (not an exclusive right.) That is, a patent grants the owner the right to exclude others from making, having made, using, selling, offering to sell, or importing a product or process that is covered by the patent. A patent does not confer any affirmative right to manufacture or sell a certain product. In fact, many patent owners need to get permission from other patent owners before they can use their own patent. (A “Freedom to Practice” opinion is a legal opinion to the effect that an owner of a patent or other IP can use that IP in commerce without infringing on anyone else’s IP.)
Patents have defined lives (generally, 20 years from filing for utility patents, 14 or 15 years for design patents). After that, the patented concept is in the public domain. Patents can cover utilitarian products or processes, software (though this is a very tricky area), aesthetic designs, plant varietals, and, in rare cases, business methods.
A patent application, which eventually may grant as a patent that you can use for offensive and/or defensive purposes, includes a detailed description, drawings (detailed descriptions and drawings are collectively known as the “specification”), and claims. While all parts of the application are important for one reason or another, the heart of the application lies in the claims. The claims define what is often called the ‘metes and bounds’ of the concept sought to be protected. That is, the claims inform the public about the time-limited monopoly that you seek, and if things go well, obtain. What you can own, for a limited amount of time, includes concepts regarding products, software, machines, designs, processes, and (in limited circumstances) business methods.
It is important to understand that each United States patent application is available to the public one year after it is filed. Thus, when you file an application for a patent, you are telling the world what your invention is, how it works, and how accomplish it.
Formal patent applications go through an examination process in each jurisdiction where they are filed before being granted as a patent. Some jurisdictions (e.g., the U.S., Europe, Canada, Japan) conduct a more robust or comprehensive examination than others, but all do a modicum of examination, in some cases, copying what other jurisdictions have done. Examination involves a back-and-forth between you and the government in each jurisdiction (e.g., the U.S. Patent & Trademark Office), and it typically takes two to five years before a mechanical or electro-mechanical invention reaches grant. An invention that heavily relies on software typically takes four to five years before grant, and an invention based in the life sciences can take five to 10 years (or more) before it grants. Obtaining a patent is truly a process that takes time. When done correctly, you can carve out an important niche for your start-up. Below is a timeline showing typical prosecution for a mechanical invention.
For a start-up, the costs of preparing and filing an application, let alone going through the examination process, can cause stress because the company needs to use the money elsewhere to grow the business. However, founders with a view toward the long-term understand that well-conceived patents, as part of a thoughtful strategic IP plan, can provide a significant cornerstone upon which the rest of the business is built. Often, founders file a temporary application, called a provisional application, to kick the costs of examination down the road for a period of time. This is typically 12 months from the filing of the provisional, but differs depending on where protection is desired.
It is important to remember that the core of your concept (what is claimed in your patent) forms the basis of whether a competitor likely infringes your patent. If a feature of your patented concept is not part of a competitor’s offering, then that competitor is not infringing your patent. For example, if you have a patent for a medical device that has features A+B+C+D, and the competitor’s device has features A+B+D, the competitor does not have an infringing device. As such, it is important to work with competent IP counsel to define the ‘metes and bounds’ of what you can protect so that you obtain the broadest protection possible under the circumstances. For example, in the above case, it is possible the claims in the patent application could have been written so as to include any combination of one, two, three, or four of features A, B, C, and D.
After you get your patent, it’s important not to rest on your laurels. There are maintenance or annuity fees to pay, competitors to monitor, and, most likely, your own products or services to implement that embody the concept you have patented. And this does not even address potential opportunities for you to license your patented technology to strategic partners.
What is considered a Trade Secret?
A trade secret is information that has value because it is not generally known to others, or that cannot be easily ascertained. The most well-known trade secret is the Coca-Cola formula, but a trade secret can take many different forms. In addition to a formula like Coke, a trade secret can be an algorithm, software source code, customer lists, a company’s internal organization, company-supplier relations, company-customer relations, or sales techniques. Trade secrets can also take the form of technical knowledge that cannot be (easily) reverse engineered, such as industrial processes or manufacturing techniques, and that add competitive value for the company. A trade secret is different from know-how in that know-how, while difficult to copy, is not necessarily a secret.
It is likely obvious from the previous paragraph that the key factors for information qualifying as a trade secret include the facts that it has value and that it is not known outside the circle of people who need to know the secret. It is important to protect a trade secret with reasonable efforts, which means one thing for a start-up with one or more founders and a few employees, and is more involved for a scaled start-up that is near or beyond the exit. What exactly constitutes “reasonable efforts” differs based on the technology and the standards generally employed in the applicable industry. The point is that if you don’t take reasonable efforts to protect a trade secret, a court might conclude that it is not a secret – even if it was “stolen” by some third party.
Trade secrets have three significant advantages over patents: there are no government fees needed to obtain a trade secret; rights in a trade secret are perpetual, meaning you do not have to give up your ‘monopoly’, assuming you keep it secret; and unlike a patent, which is itself a public document (and for which the application is also public typically well before the patent is issued), a trade secret need never be disclosed to the public. These advantages are tamed by the fact that the protections behind a trade secret (i.e., protection against improper disclosure or use) evaporate if the knowledge behind the trade secret is gained independently (e.g., through reverse engineering). A trade secret lasts only as long as the information is kept secret.
While trade secrets have long been protected under common law in each state, there is now federal protection provided under The Defend Trade Secrets Act of 2016. Federal protection is important because an owner of a trade secret can now sue in federal court if its trade secret has been misappropriated.
To sum it up, information qualifies as a trade secret if it is (i) kept secret, (ii) derives economic valuable from not being generally known, and (iii) is protected by “reasonable efforts” to maintain secrecy.
Copyright – Isn’t This Type of IP for Book Authors?
Let’s get to the answer: no, copyrights take many forms and are useful for more than protecting the latest and greatest novel. A copyright protects the expression of an idea, not the idea itself (that’s what patents are for), including published or unpublished works. Like a patent, a copyright is an exclusionary right. It protects against copying, performing, adapting, or displaying original works of authorship such as documents that describe certain technology (e.g., software code, a user manual or an installation manual, a Youtube video tutorial, etc.).
“The expression of an idea that is an original work and that is ‘fixed’ in or on any tangible medium such that the work can be perceived, reproduced (with permission), or otherwise communicated to the public” is a more formal definition of a copyright. A copyright is protected by common law and federal law, but to take an infringer to court, you need to register the copyright with the U.S. government. Under current law, a copyright lasts 120 years from creation.
One important consideration for copyrights, especially for scalable companies that heavily rely on software as their platform, is the concept of “work-made-for-hire.” Generally, the author of a work is considered the owner of the copyright in the work, even if the author was paid by some other party to create the work (in which case the author and the contractor share ownership such that each of them can use it without the other’s permission). When an entrepreneur wants to pay someone to create a work, like software, the entrepreneur should have a work-made-for-hire agreement with the creator. If copyrightable material is “made-for-hire,” it is owned by the entity or person commissioning the work. There are several factors that determine whether a work is a work-made-for-hire, and who owns the resulting work. As such, it is important to understand what qualifies as a work-made-for-hire so that you do not end up having to pay a royalty to the creator of the work embodying the copyright and/or let the creator independently commercialize the work.
Tell Me about Trademarks
Start-ups are full of creative people, so it is not hard to imagine that one of the first items of business after or alongside formation is determining your business name/brand. However, you need to avoid the pitfall of not doing enough research on a name you think is unique.
The basis of a trademark exists in the fact that, with just a logo or a company or brand name, you can (i) figure out what the product or service might be, and (ii) identify the product or service associated with the logo. A trademark protects items that are used in connection with goods or services to identify the company behind the goods and services. Similarly, trade dress protects the look and feel of a product (think of the storefront and décor of a Chili’s or BW3’s restaurant). A trademark, or trade dress, helps consumers decide whether they want to buy or avoid a product or service based on their prior experiences with something else bearing that trademark. For example, a consumer who had a positive experience with a Ford vehicle may decide to buy another Ford vehicle in the future. Thus, a trademark that builds a positive reputation in the marketplace is an invaluable business asset.
While a mark that is considered “generic” has no protection as a trademark, there are several different types of trademarks that are protectable. These include “descriptive” marks, “suggestive” marks, “arbitrary” marks, and “fanciful” marks. Descriptive marks, or a word (or words) that merely describes a product or one of its ingredients or attributes, require that the mark have some secondary meaning and cannot simply rely on the mark itself. Think of “Sharp” TVs: on its own, this type of mark is too weak to function as an identifier of a product or service. A suggestive mark, like Microsoft or EatStreet, is distinctive in nature, but suggests or references a product or service such that some effort may be involved to tie the product or service to the mark. Arbitrary marks (Samsung is a good example) and fanciful marks (Xerox is a common example) do not need any imagination to tie the product or service to the mark. These latter two categories provide companies with the strongest protection, but often require some marketing to establish the link between the product or service and the mark. It is important to always use trademarks in a consistent format and as shown in a registration certificate, if you have obtained one.
Trademarks are protectable under common law, state law, and federal law. If a mark has the designation “TM,” it signifies that the mark is not formally registered but may have rights under common law. A ® designation at the end of a mark provides notice that you own a trademark registration (i.e. the registration certificate has issued) wherever you have registered the mark. In the U.S., a mark must be used in commerce for it to remain a trademark (regardless of registration), but the trademark lasts as long as it is used in commerce. In other jurisdictions, like Europe, a mark has weight when it is registered. It is important to remember that you don’t need a federal registration to own trademark rights. However, without a registration, your rights will typically be limited to the geographic area in which your products or services are offered. Other benefits of federal registration include public notice of your claim of trademark ownership, and the ability to more effectively prevent importation of infringing or counterfeit products.
Some do’s and don’ts: Never use a trademark as a noun or verb. A trademark should always be used as an adjective that modifies the common name for the goods or services it covers – e.g., “a Rockhopper bike” (not “a Rockhopper” or “Rockhopping”). Always use trademarks in a consistent format and as shown in a registration certificate. Use one or two words, punctuation (if it is part of the mark), the same font, and the same design. It is important to protect your mark: if you fail to take action against entities that misuse your mark, a court may conclude that your mark is no longer valid. The trademark “Thermos,” for example, was lost, with respect to its original meaning (a vacuum bottle for maintaining temperature,) when it was found to be a generic term for a vacuum bottle.
Tell me about Non-Compete Agreements
A quick digression. There are two kinds of non-compete agreements in the world. The first kind, which is not the subject of this FAQ, is a non-compete “coupled with an interest.” An example would be an entrepreneur who agrees not to compete with the company that acquires her business. The second kind, the subject of this FAQ, is a non-compete between a company and an employee generally, as say, a start-up might want a software developer to agree to.
Non-competes have a problematic place in the start-up world. There is a fair amount of evidence that one of the several reasons California emerged as the center of the start-up/VC universe is that non-compete agreements are not enforceable in California and never have been. As a result, it is easy for employees to leave their place of employment and directly compete with their former employer, even using skills (though, if the employer was smart, not IP or confidential information) from the former employer. In fact, the reach and enforceability of non-competes varies from state to state. While the trend over the last couple of decades has been to limit the reach and enforceability of non-competes, they remain more or less useful in many states.
Here is the bottom line. While most experienced entrepreneurs and most VCs don’t like non-competes as a policy matter, most of them will use them to the extent they are available, at least as to key employees. The challenge is figuring out where your employees are, what state law(s) could come into play, and then tailoring your non-competes to fit within the scope of those laws. Which means you'll need a good lawyer who knows the rules in this complex and evolving area of the law.
Tell me about Assignment of Invention and Work for Hire Agreements
You’ve launched your business and you’ve hired a CTO to refine your idea into a patentable product, which they do. And patents. And quits to start their own company powered by the patent. Then, the consultant you hired to program the software that runs the patented device joins them, taking the software they wrote for you with them. Your start-up’s future just got a lot more complicated.
You, of course, want to avoid the above scenario. To do that in the case of the employee CTO, you make sure they signed an Assignment of Inventions Agreement as a condition of their employment, which makes it clear that everything they invent on your time or with your property belongs exclusively to you. In the case of the consultant, before they start, you make sure they sign a “Work for Hire” Agreement that provides that their work product (software code in this case) belongs exclusively to you.
This is one of those areas that can really trip up the unwary entrepreneur, and for good reason. Most people quite naturally assume that if they pay someone to write software code for them, they (the people paying the developer) own the code. And, in fact they do. But, absent the Work-for-Hire or Assignment of Invention agreement, so does the developer.
What about Pitching Investors? What Can I Tell Them?
In the ideal world, you would never have to tell anyone anything about your secret sauce, whatever form it is in. In the real world, you are likely going to have to tell some people at least some of your secret sauce, ideally under a rock solid Non-Disclosure Agreement.
Alas, the vast majority of VCs just do not sign NDAs, and certainly not in connection with a review of your business plan or a first pitch for their capital. There are various good and not-so-good reasons for this, but it is what it is.
Does that mean you include proprietary information in business plans and pitches you provide to investors? NO! Your business plan and your pitch should not include proprietary information. They may include what you can accomplish with your “secret sauce,” but they should not include the recipe for it.
A couple of points:
First, remember that your business plan and pitch documents are not designed to persuade an investor to write a check. They are designed to get them interested enough to go take a really hard look at your deal. Very late in the process, often even after there is a term sheet, there may be a time where you have to share some proprietary data pursuant to an appropriate NDA.
Second, to the extent you claim to have a “secret sauce” that is highly implausible, say, that you have found a way to violate the second law of thermodynamics – a claim our team has seen twice - you’d better have awfully compelling indicia of credibility in your plan (say, that Stephen Hawking is your CSO). The point here is that the overall quality and weight of your plan (team, claims, etc.) need to be strong enough to get a prospective investor to want to know more, not to give them all the due diligence they needs to write a check.