AJ PARK | BLOG POST | NEWSLETTER | START-UP | TIPS & TRICKS
What intellectual property (IP) related steps should a start-up take? The answer is that they should take all the same steps as a large multinational, but within their budget. So in fact they end up taking quite different steps.
Make IP decisions and do so early
One of the main (and early) steps is to make a considered decision about what IP means to the business and what IP tools will be used to support the business model. Not doing so can cause big problems later for your business. Not doing so will also mean that you will have no answers to the IP questions raised by future investors or exit targets at the time of their due diligence. Asking them what they mean by FTO is not a good look.
You may answer with the fact that you made a conscious decision to not pursue registered IP rights – which can be perfectly acceptable. For example, start-ups often do not register their trade marks because they have an exit strategy in mind – an exit strategy that will see their business absorbed into a large organisation with its own house brands already in place. On the other side, the brand may play an important role in the value of the start-up. Eg TradeMe, Xero and 42 Below.
Avoiding any IP speed bumps
One major difference between big companies and start-ups is that big companies can steam roll over mistakes they make with their IP. Start-ups cannot afford to have such speed bumps. For some, dealing with one or two speed bumps may be fine, but multiple or compounding problems could be crippling. This makes it even more important for start-ups to make careful IP decisions very early on.
I was involved with the preparation of an investment disclosure statement for a well known New Zealand company that wanted to raise capital to expand their service into the USA. They had been running their very successful business in New Zealand for 10 years. Within the space of three hours of searching the US patent office database, I found a show-stopper patent. Patent infringement was certain had they entered the US market. We investigated if the patent was available to license, only to find out that it has been licensed exclusively already. The IPO did not proceed.
The shotgun approach
Start-ups cannot afford a full suite of IP protection. So as a start-up, you need to prioritise and stage your IP spend to help achieve your desired overall business strategy. A shotgun approach to IP protection is not realistic. This means that start-ups need to have an even better understanding, compared to larger companies, of the value that IP can have to their business. Start-ups need to make every shot count especially because the proportional value of IP, compared to the total value of the start-up, is much larger than for an established company. Sometimes IP is the only asset a start-up has.
Types of IP protection
It is vital to know early on what IP protection a start-up can have, what the benefits will be, and what the costs will be to secure such protection over time. It is important not to bite off more than can be chewed.
Some forms of IP protection are not expensive. IT system firewalls help protect your trade secrets. Using Non-Disclosure Agreements (NDAs) can ensure your know-how is not misused. Copyright is free and can protect your source code or manuals from being copied. Keeping all, or some, IP secret may be the best form of protection.
However, the costs of keeping such secrets, or the cost of losing the secrets to your competitor, can also be high. One employee of General Motors sold trade secrets a few years back, costing the company an estimated $40m. It is estimated that trade secret theft costs the US economy $300 billion in 2012.
Failure to protect IP is like not locking up the lab or office every night. Eventually someone will come in and use what is not their own hard work.
The keys are:
to identify what IP rights are going to give maximum effect in increasing the value of the business budget for it and implement do so early.
The crystal ball
I keep talking about being early with considering your IP strategy. This is because many forms of registered IP rights need to be filed before they are made public. This means that crystal ball gazing may be necessary. But being equipped with information about what will impact the scope of IP protection, what you will be permitted to have, will help crystallise thinking. Perhaps your invention is not as original as initially thought and as a result, the scope of any patent will be so narrow that it will be of no commercial value. But on the flip side, the invention may be very unique and entitled to very broad protection.
Another difficulty that start-ups have, is crystallising their business model so that IP tools can then be chosen to support the model. Changes are often made to the business model of start-ups based on changing exit or market opportunities and FTO risks that may surface down the track. Large companies have the benefit of knowing who they are and how they will grow older. A manufacturer like Gallaghers know their road to market and use IP to keep competition out of the market. So some degree of a shotgun approach may be necessary, ensuring a regular review of the IP strategy is done so as to cull any redundant IP.
Points to think about
All these things can help increase the value of the start-up and show you are on the ball with your IP when someone wants to make you an offer you can’t refuse. This aspect is really important – being IP savvy and ready for the sale and purchase process, or whatever the next phase in the start-up’s life may be.
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