IP 101 for start-ups

Article  \  11 Sep 2018

What intellectual property (IP) related steps should a start-up take? Start-ups should take the same steps as a large multinational, but within their budget.  

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 your business and what IP tools will be used to support your business model. Not doing so can cause big problems later for your business. You need to have answers to the potential IP questions that may be raised by future investors or exit targets at the time of their due diligence..

You may have 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 trade mark protected house brands already in place. On the flip-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 and to get good IP advice from a patent attorney that knows their industry.

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 US. 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 owned by a US company. Patent infringement was certain had the New Zealand company entered the US market. We investigated if the patent was available to license, only to find out that it had been licensed exclusively already. The IPO did not proceed.

The shotgun approach

Start-ups cannot always 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 of research and development spanning over 20 years. It is estimated that trade secret theft cost 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 key steps are to:

  1. identify what IP rights are going to have maximum effect in increasing the value of the business
  2. budget to protect your IP and implement
  3. 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 in place before new initiatives 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, and what you will be permitted to protect as yours, will help crystallise your 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 the right 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 Gallagher knows its road to market and uses 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 of these things can help increase the value of a 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.