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20 Feb 2018

Effective IP Strategy for Start-Ups

Recently, while researching for a talk on IP strategies for start-ups, I realised that Intellectual Property (IP) experts tend to view this topic through pretty much the same lens through which they see IP for any other entity. Almost every article related to the topic of “IP for start-ups” essentially covered the importance of IP in general without distinguishing the fact that start-ups are different from larger, more established entities. While advising start-ups on IP, experts generally try to push start-ups to create and protect IP, ignoring their life-stage, financial situation and process maturity.

Based on my personal experience on advising start-ups at various stages of their life cycle, my first thought was that for start-ups, IP is in fact much more than just Patents and Trademarks. Founders often start their tryst with IP long before the legal entity is even formed. Therefore, they must be advised and guided to create an ethical IP centric culture and eco-system in the organisation for a sustainable long-term success.

My endeavour in this article is to touch upon start-up related IP issues that probably begin at the inception stage of a start-up. I believe that at different stages in a start-up, different actions are needed to define, recognise and secure IP rights.

THE FIVE STAGES OF A START-UP’S BUSINESS LIFECYCLE

It is important to understand that the process of securing IP could begin well before the business idea underlying the venture is conceptualised. Although not every start-up goes through all these different stages (or strictly in this sequential order), I have, for ease of understanding, divided the life-cycle of a typical start-up venture into the following five stages:

            Stage 1: Seed Phase

            Stage 2: Development & Testing

            Stage 3:  Go-to-market

            Stage 4: Expansion/scaling

            Stage 5: Maturity & Possible Exit

These different stages have been explained herein below from an IP point of view:

STAGE 1: SEED PHASE – Employment vs. Your Idea

Most start-ups are conceptualised by the Founder(s) while they are still in employment. There is thus a high probability that the idea was triggered by something that the Founders observed in their work. If this is indeed the case, it is necessary to take the following precautions to minimise risks:

  • Know your obligations under:-
    • Your Employment Contract;
    • NDA, IP Assignment;
    • Non-Solicitation, Non-Compete clause etc.;
  • Avoid using Employer’s resources to work on your idea;
  • Avoid working on your idea during your regular work time;
  • Keep your employment related work distinct and separate from your new idea so that conflicting obligations do not risk your IP.

Remember that, IP rights ordinarily belong to the individual who creates the work unless the creation occurs as part of the individual’s duties and obligations arising from their “contract of service” or “contract for service”.

Even if you have followed the above guidelines, however if your idea is related to your employment, do not file any Patent application unless you have made an exit and completed all your contractual obligations (e.g. notice period, pending work, handing over etc.). It is not wise to file a Patent application even in the name of your family members in you are in employment. Always consult an IP Attorney if you find yourself in a situation like this.

Notwithstanding the above, if your idea is about a new technology or involves an innovative process, consider getting a professional search done to confirm the novelty and inventive step before moving forward. This would help you build your business on a “clean slate” without having to worry about infringing someone else’s IP. It will also save you time and money in the event that you later find that someone else already has the rights to what you are doing or something very similar.

STAGE 2: JOURNEY, DEVELOPMENT & TESTING – Don’t let others claim ownership of your idea

Entrepreneurs usually start their journey by bouncing off their ideas with friends, mentors, seniors at work, families etc. This is a natural human tendency of seeking approval and assurance as the step being contemplated, is usually seen as risky. With this group of people, getting an NDA signed is impractical; therefore, the next best thing is to disclose minimum information. However, if the idea is to be shared with a legal entity, get an NDA signed or at least create a record (may be through a follow up email). This is to confirm what was disclosed, discussed and for what purpose. The objective is to establish ownership over the idea.

Now, if you are developing a product of your own, please make sure that you use all proprietary/genuine licensed software. If team members are working on the development, get them to sign an NDA and an IP Assignment agreement.

If the work is outsourced to a third party, execute a Service Agreement that incorporates specific confidentiality, IP Assignment and Indemnity clauses. If the product involves IP, get an NOC signed by the individuals involved in development so you can apply for registration of a suitable IP at the right time. Remember, if everyone is clear about their roles and responsibilities, it sets the tone across the team (or organization) for IP ownership.

Audit to Identify and Protect

Evaluate your core assets around the product/business model to identify and determine the type of protection needed for your IP. While developing the product, evaluate if there is some invention which requires protection. Since development takes time, it is better to file a provisional patent application sooner than later.

STAGE 3: GO TO MARKET

It is a well-known fact that many start-ups have failed due to lack of a Co-founder. It may not be necessary to conceptualise an idea with another person; however, it is widely accepted that a co-founder with complementary skills is helpful to the start-up. If you have a Co-founder, it is advisable to have a Flegal ndrs al  a co-funder e the idea with your co-foudner miay b.ounders’ Agreement in place. In fact, the Founders’ Agreement could even be used as constitution for the incorporation of your entity. The idea is to clearly link IP ownership and route it to the legal entity (and not individual Co-founder). This reduces the risk of dispute over ownership (product/business model) in the event of fallout between the founders.

Although it may not be possible to predict such fallouts or avoid such risks altogether, having the necessary documentation will enable a relatively smooth sailing during the resolution of a dispute. Other than a Founders’ Agreement there are a few other vital agreements/documents for start-up ventures to consider:  

  • Employment Contracts with specific NDA/IP Assignment/ non-compete clauses;
  • NDA, IP Assignment and Service Agreement with all Partners/Vendors/Consultants;
  • Online Presence: Terms of Service & Privacy Policy.

Creating your identity: Naming your idea, your brand

Some other important steps are needed at this stage as you freeze on the name of your entity and the brand it uses to carry on business. It is absolutely not necessary to have one name for your legal entity and brand. The legal entity can be given any name, subject to the availability; however, the more important thing is your brand name. Due care must be taken before choosing a brand name.

Keep in mind the following tips:  

  • Search- Google, TM database, India & Abroad – RoC/Domain;
  • Choose: Distinct & Catchy name/brand;
  • Avoid: unusual spellings, temporary names;
  • Register: Your brand.

Once your Legal Entity is set up and the product/business platform is ready, do remember to evaluate your assets (once again) before going full-fledged into the market. This is to eliminate the risk that, in the interim, nobody else has registered a similar brand. Also, identify your IP around your core business and explore the possibilities of protecting the possible IP to avoid a “me-too” product/business at your cost.

STAGE 4: EXPANSION/SCALING

This is the stage when the business starts growing, with multiple customers on-board. By now, technology product companies would be likely to have an IP portfolio. But even if your venture does not have your own IP portfolio, you are probably in a position to acquire IP- provided it makes sense to your business.

While acquiring an entity for its IP or technology, make sure you conduct an IP due diligence to validate the title; and also determine the utility of this IP for the purposes you envisage. IP due diligence also ensures that the IP being bought by you is free from any lien.

Induction of new recruits

Sometimes, an acquisition includes transfer of a technical/support team. In such cases, just as how you hire new employees, you need to take steps to ensure the following:

  • The team/candidate is not under a non-compete obligation;
  • Individuals are not bringing any confidential/proprietary information with them;
  • Confidential/infringing information of a third party is not being used by such employees;
  • Thorough reference checks of individuals are done;
  • A training session should be organised for all the new Employees making them familiar with the Company’s IP policies which should also include the IP practice, use/creation/protection of Company’s IP and restrictions on unauthorised use of any third-party IP.

STAGE 5: MATURITY & POSSIBLE EXIT

For various reasons (be it IPO, Acquisition or otherwise), the co-founders may, at some point in time, decide to exit the business altogether or perhaps take a back seat. Before doing so, it is advisable to conduct a comprehensive IP audit to ensure that there are no loose ends that would make it hard for the new team to run the business or expose the entity to legal risks. Such an audit may well be part of a comprehensive management review and financial audit. If any issues are identified, take corrective actions, including resolving any IP disputes or open issues that could become liabilities in the days to come. The existence of such issues can also impact your venture’s valuation.

Create your depository

It is very important to create a depository that contains important documents and other information such as:

  • Key Agreements: Related to Founders, Employees, Partners, Vendors’ etc.;
  • IP Portfolio: Patents / TM/Copyrights/ Domain etc.;
  • Licenses : Third Party Licences including IP and Software;
  • Key Trade Secrets & Proprietary know how; and
  • Social Media Account details (log in ids and passwords);

CONCLUSION

Although building an IP portfolio is important for any start-up, it is perhaps even more important to build an eco-system within the organisation which is conducive for creation and protection of IP. This IP culture will not only drive innovation, but it will also ensure that your business is reasonably protected against accusations of IPR violation. This in turn will strengthen the venture and build your brand.

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