When a new business is started it often has two primary assets. The first is the talent of the founders themselves and the initial group of employees they have attracted to their work. The second is the business’s initial portfolio of intellectual property—chiefly its trade secrets, patents, and patentable inventions. In the rush to find foundational customers or impress angel investors, startups also need to give early attention to formalizing their IP management. Here are some considerations that often need to be addressed early in a company’s life-cycle:
Before an asset can be protected it needs to be well defined. Conducting a detailed inventory of a business’s intellectual property may be a quick exercise or it may involve answering difficult questions. For example, if the business has a novel invention, will it be protected as a trade secret or will the business pursue a patent? The answer to this question has significant ramifications for how the technology is handled even at in the business’s earliest stages. At the same time, founders need to be clear with each other about what intellectual property they will not be contributing to the business. Many tech startups are launched by people with distinguished, innovative careers. By defining with specificity the scope of the IP that will be part of the new business, founders can ensure that they do not face later disagreements about inventions they do not intend to transfer into the business.
Every invention of the startup’s founders that will become a part of the business’s portfolio should be transferred to the corporate entity early in the business’s life cycle. Typically this transfer happens after the initial incorporation and organization of the business, but it may happen concurrently if, for example, the business will issue stock or other securities to the founders in exchange for their contribution of intellectual property. If multiple specific IP assets are involved, it may be important to document each transfer in a separate agreement. The assignment documents are likely to become important records when the business pursues financing or seeks to register its patent or trademark.
The founders of a new business should treat it like a marriage. The positive feelings and excitement of the business’s early days may give way to arguments later. By documenting each founder’s ongoing claims to the company’s IP, everyone involved can move forward with a clear understanding. This process might be resolved through IP transfer agreements alone, but it may also require documentation elsewhere. For example, founders who contribute a jointly developed invention to a new corporation might wish to retain specific voting rights. In this process founders will need to weigh their personal interests with potential concerns of early investors, who are likely to want the business to have clear and unimpeded ownership of all of its important IP.
Some startups prefer to protect their inventions as trade secrets, which does offer certain advantages over filing a patent application. But if pursuing a patent is the preference, the company should not delay. The first-to-file standard in U.S. patent law places a premium on quick filings. Startups also need to think about their expected brand strategy. If the company will be more than just a holding entity for an IP portfolio, it probably will need a name and logo. Studying potential names and drawings from a trademark perspective can be an involved process. But for many businesses, trademarks can become significant and valuable assets in their own right. Once a trademarkable name is chosen, filing an intent-to-use application with the U.S. Patent and Trademark Office can begin the process of laying claim to the business’s brand even before it begins full operations.
In a marketplace as competitive as technology, innovators need to zealously protect their work against misappropriation by competitors. Anyone who does business with the company and who will have access to its confidential information should be subject to a well-drafted nondisclosure agreement. This includes anyone who will do work for the company, whether as unpaid interns, contractors, or full employees. It should also include vendors that might have access to sensitive data, like software consultants.