How Much Should Startups Invest in Intellectual Property?

Before investing in patents, all startups should take two simple, low-cost steps: briefly check freedom to operate and put the right legal documents place.
russ
Russ Wilcox
Expert Columnist
June 22, 2020
Updated: August 11, 2020
russ
Russ Wilcox
Expert Columnist
June 22, 2020
Updated: August 11, 2020

Startups must concentrate their precious cash on product development and customer testing. So how much should be diverted to protect intellectual property?

It’s not a simple question to answer. Trademarks and patents are granted on a “first-to-file” principle, and the sooner you file them, the better. But the payoff is distant and uncertain. Gaining the ability to sue copycats only becomes valuable after there is a business worth protecting.

And even if you did have an issued patent, it would still cost millions to sue anyone worth suing! As one of my mentors Steve Ward, the former CEO of Lenovo, used to say: “Patent litigation is the sport of kings.” What are the odds your venture will survive long enough to benefit from filing patents?

To manage the tradeoffs, all startups should first take two steps at seed stage that are vital, yet cost almost nothing. Then you can consider whether patents are a key part of your strategy and how to rightsize your patent program.

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Early Step One: Briefly Check Freedom to Operate

Will your future products infringe on someone else’s intellectual property? If so, you could lose your right to sell your product, and not even know you have a problem until after you launch. A patent troll is not going to bother to sue you until after you have success.

Forewarned is forearmed, so it is worthwhile to check for major conflicts early.

Let’s start with brands. Search the U.S. trademark database to be sure that your company and product names are not confusable with a competitor’s similar registered name. Then, search again on Google, because not all competitors will formally register their names, but they still have “common law” trademark rights if they start using a name commercially before you.

What should you do if you see your name is being used by a competitor? There is any easy way to save yourself a lot of agony: change your name! Easy to do now, hard to do later.

Next consider your technology. Are you developing a product that incorporates an advanced technology that was invented by someone else less than 20 years ago? Then check the U.S. patent database to see if others have already filed a patent on your product concept. If so, you’ll need professional help to determine how to proceed.

We do not usually recommend hiring a patent attorney to run a freedom-to-operate search while you are at seed stage. That will cost around $30,000, and even if you are mostly clear, the lawyers will often find some minor issues. These become special headaches for startups, because you have a duty to disclose any IP concerns to future investors.

Instead, spend 10 hours of your own time on these searches. Do your best to catch any major issues early on, when you still have flexibility to change your company’s technical approach. This won’t cost you any cash, and you can learn a lot by looking at your competitor’s filings. Consult an attorney only if you have specific questions.

After you close Series A and have more cash, you can go back and pay for a more comprehensive search and be ready to redesign your product’s second version if there are minor issues.

Finally, if you are writing software, be sure to check your stack and identify any open-source components. Make sure you understand any obligations that come with each open-source license, because some require you to open source your own code. Again, do this early, while you can most easily make changes.

 

Early Step Two: Put the Right Legal Documents in Place

These days a vast portion of what most startups develop is intellectual property. This is not just patents and trademarks, but also any kind of work product, such as code, designs, drawings, presentations, budgets, brands, customer lists, and operations procedures.

That is what every startup needs an Intellectual Property Assignment Agreement. This is a legal document that every employee should sign on or before the first day of work. Similarly, every consultant you hire should also sign a contract in advance that requires them to assign any inventions that result from their work to your company. Ask your lawyer for this.

That covers you internally. Now think externally. Every time you work with an outside company, you should first put in place a legal protection that requires them not to steal or reveal your company’s ideas and inventions.

The scope of the contract should match the intimacy of the relationship. If you are just having brief business discussions, then a two-page non-disclosure agreement (NDA) will be enough. If you are going to be sharing code or sending physical samples, or if you will be working closely with another company to co-develop a new product, then you will need more lengthy and detailed agreements such as a beta license, material transfer agreement, or even a joint development agreement. The role of these contracts is to make sure you can collaborate with another company without later regret. Pillar VC published detailed suggestions about how to manage these legal documents in Part 5 of the guide How to Build an IP Fortress.

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Rightsize Your Patent Program

There are plenty of startups betting on new products, new marketplaces, new brands, or new channels. For the most part, companies apply existing technology rather than invent technology, and that is why most startups do not need their own patents and should not budget for them.

On the other end of the spectrum, deep tech and biotech startups live and die on their unique capabilities, so they must protect their ideas with extensive intellectual property filings. A deep tech startup can run up patent expenses in the hundreds of thousands of dollars!

Pillar VC explains deep tech techniques and strategies in the guide How to Build an IP Fortress.

What if your start-up has an original, clever idea that is simply an enhancement over the competition? You might feel somewhere in the middle and wonder whether to file a patent.

The guide mentioned above starts with a primer to help you understand what is and is not patentable. Briefly, a patentable invention has to be “eligible, useful, non-obvious, man-made, and enabled.”

One of the advantages of filing a single patent is that you can say “patent pending” on your sales documents and investor pitches, and this will help communicate that you have a unique or original benefit.

One tip here is not to spend a lot of time filing “method” patents, because they can be hard to enforce. For example, if you discover that playing disco music makes chickens grow faster, you might be able to get a patent on that method, but when you walk into the supermarket, you won’t have any easy way to know whether your competitors are using your idea. Patents are most valuable when you can immediately prove that a competitor is infringing. Instead, keep your methods as trade secrets.

Another tip is to file any patent application before you start sampling or selling the product to the market, even in prototype or sample quantities. The moment you start offering your invention for sale, the government sees that as sharing your idea with the world, and you will lose the right to patent (within 12 months in the United States and immediately in many other countries).

If you decide to proceed, filing a single patent can usually be done for under $10,000 and is a reasonable use of seed funds. It’s usually not worth spending more than that just to protect a moderate competitive edge in the future. Instead, focus your money on the main event: designing and building a hit product as fast as you can. That is the real key to a successful seed stage.

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