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Investment in IP-Deficient Startups - A Risk Perspective


Entrepreneurs are quite apprehensive of the early stages of a new business, and they understand that it is an unbelievably engrossing time and thus they focus on constructing the primary team, structuring the company, inviting investors, developing the product, and developing elementary partnerships, sales channels, and marketing plans. All this poses a challenge to concurrently focus on IP issues. However, this early time period is also a critical time to secure that a business takes steps to protect its core intellectual property and avoids the risk of third-party intellectual property affairs. There is a greater reason for having a solid grasp of intellectual property and developing an IP strategy that is in terms with the business as it is a crucial part of developing a new venture on a solid foundation.


So is rerouting necessary for safeguarding intellectual property? Trademarks and patents are granted on a “first-to-file” principle, and the sooner you file them, the better. The only chance to prosecute imitators only becomes valid after there is a business to protect. Steve Ward, the former CEO of Lenovo said “Patent litigation is the sport of kings.” What are the odds your venture will survive long enough to benefit from filing patents?


Awareness about IP laws

Intellectual property protection is offered by various laws. The Copyright Act, 1957 protects original works including artistic, literary works, as well as software. The Patents Act, 1970 protects inventions, specifically scientific inventions. The Trademarks Act, 1999 protects brands, trade names, logos, color combinations, and other source identifiers. The Designs Act, 2000 protects aesthetic elements of industrial design. Apart from this, confidential information and trade secrets are protected under common law. Startups need to take IP very seriously, not just for consent, but for retaining an asset. Employing an in-house lawyer is a great idea for startups that are growing rapidly because what is most needed is legal advice that takes into account the goals, strategies, and limitations of the business of the company.


What are the Risks?

Since IP is the moving force of many companies, this is a prosperous time for IP. Companies are built around patented technology. Patent filings and issuance are escalating, the courts are pro-IP, as is legislation – even the Antitrust Division of the U.S. Justice Department is pro-IP.

  • Availability Risk: It is very important for the company to protect all its information available against potential infringements. A startup company that has created an original work or produced a novel product may be startled to find out that someone else appears to have copied, performed, or distributed it without permission. Now the company may be able to bring an infringement action in this situation, as long as it has registered its IP assets with the USPTO.

  • Brand Risk: A company’s brand is part of its IP and can be one of its largest assets. It is important to protect the company image and brand reputation. If a name or logo is not registered as a trademark, the startup company cannot be certain about its belonging. If another person or business registers the mark first, it may find itself in the highly inconvenient and very costly position of being dragged in litigation and potentially having to withdraw your products, redesign your packaging and marketing literature, and pay damages or an account of profits to the registered trademark owner. Leaving aside the quantifiable costs, the venture could also risk any goodwill that it may have established in the brand name, over a product that it has painfully taken years to create, just because it didn't take the extra step of registering it.

  • Access Risk: Access risk includes the risk that access to information (data or programs) will be inappropriately granted or refused. Access risk ensures the protection of trade secrets. If startups do not follow the trade secret law and do not protect their secrets and confidential business information, then the trade secret cannot be protected against being discovered by fair means and by reverse engineering. In such a situation, the owners of the company cannot take any legal action against the other person or company. Trade secret law is considered necessary to ensure the fair functioning of the market and to promote innovation by suppressing anti-competitive business behaviors.

  • Compliance Risk: Due to the number of legal issues concerning IP rights, it is important to be aware of their legal implications.

Radical changes in the mechanism of intellectual property (IP) have adequately modified the way leading companies are thinking about IP strategy. A decade ago, companies displayed IP primarily as a weapon to exclude rivals from a domain or to generate royalties. But today, the best IP strategy is often to collaborate rather than confront. Patent owners still demand claims, demand royalties, and seek restraining orders but the current scenario is driven by the belief that companies stand to benefit the most by working with other companies to ensure that they have the freedom to operate in specific technology domains.


On the supply side, a combination of new legislation and critical court decisions in the US has made it harder to get, keep, and deploy patents. On the demand side, digital transformation is creating a much broader market for IP. With every company becoming a technology company, patents in domains such as artificial intelligence (AI) and the Internet of Things (IoT), among others, are the new coin of the realm. These shifts are creating new opportunities for companies that are “long” on IP to cooperate with traditional companies that may be “short.” Many tech companies have a surplus of IP, while industrial goods companies face a slippage. In an IoT world, they are starting to work together to expand the market for sensor-enabled and location-aware goods and services. Classic, exclusive IP strategy is not dead, but companies need to master a more sophisticated approach and to the point manuscript for how to create gamesmanship through IP.

It's a staggering process once you set sail a new business. It may leave you in doubt, anxiety, and a ton of other legitimate issues. Thus, to avoid such potential problems, businesses need to stay aware of their Intellectual Property Rights. Once the fundamentals of deciding the right business structure are cleared, IPR helps to differentiate the business from the competitors. Some strategies for the protection of IP rights from the above-mentioned risks are mentioned below.


Steps to Avoid Risks

  • Prioritizing IP Protection: Start-ups cannot afford the complete protection available under the intellectual property mechanism. The foremost step for any startup is to evaluate, analyze, and prioritize the IP Rights involved in its business. Depending upon the type of industry involved, IP rights play an important role. Failure to identify or prioritize IP Rights, presumably create problems for a startup's business, especially during negotiations with future investors. Sometimes IP Rights are the only asset available with a startup.

  • Protecting IP rights: It is in the long-term interest of startups to have an Intellectual Property Policy for management of various IP rights which may be presently owned, created, or acquired in the future by startups. The aim of such a policy is to ensure that there are no inter-se disputes between the promoters of the startups, which remains to date to be one of the main concerns for the failure of startups.

  • Registering IP Rights: Major IP rights including patents and designs are important to get registered before a protection claim. Secondly, certain IP Rights like trademark and copyright need not be mandatorily registered for protection. Nevertheless, a registered IP Right carries a greater value and acts as evidence of the use of the IP Rights before courts as well as enforcement agencies.

  • Awareness of IP Rights: For any startup, it is crucial that it does not violate the IP Rights of any other person. This will ensure safety from unwarranted litigation or legal action which can counter its business activities. This makes it even more important for startups to make careful IP decisions in the initial phase and be thorough with the IP Rights, which it is using or plans to use.

  • Agreements related to IP: Proper documentation in the form of agreements like NDA’s, agreements with employees or independent contractors, can cut ice between the success and failure of startups. The intellectual property so created, must be protected through a proper agreement between the founder or key employee or a third party, as the case may be, and the startup. If the agreement, with founders or employees or a third party, under which a novel idea was/is created, is left, it could lead to obstruction later after such an idea becomes successful. Accordingly, the startups need to ensure that anything created on behalf of the startup, belongs to the startup and not the employee or a third party. Further, it is advisable to enter into elaborate assignments, licensing or user agreements, and care should be taken to make provisions for all post-termination IP Right issues.

Conclusion

The process of bringing a new startup business to life to launching new products to the marketplace can be an exciting time. However, many startups are so focused on bringing a new product or service to market that they fail to take the necessary steps to protect the associated IP. Failure to put an IP plan in place can wipe out valuation and expose the startup to potential third-party infringement risk. IP is often considered as expensive, complex, and difficult to deal with and if it is not prioritized, it may lead to a lost opportunity to prevent competitors from entering the market with a similar product. This in turn can lead to a contagion effect on the business value making it harder to invite investors to invest in the venture.

In contrast, startups can protect and exploit their IP assets to build value and revenue by developing an IP plan as part of their conception, creating an action plan to protect IP assets including protection of confidential information, securing ownership rights to the IP, conducting freedom-to-operate searches, and ensuring properly drafted IP-related agreements are in place.


References

  1. https://www.natlawreview.com/article/what-start-ups-need-to-know-about-intellectual-property

  2. https://www.mondaq.com/india/trademark/456442/intellectual-property-rights-ipr-for-startups

  3. https://builtin.com/finance/seed-dollars-intellectual-property

  4. https://yourstory.com/2018/05/intellectual-property-law

  5. https://www.jdsupra.com/legalnews/avoiding-common-ip-pitfalls-what-every-34624/

  6. https://www.investopedia.com/articles/personal-finance/041315/risk-and-rewards-investing-startups.asp

  7. https://info.knowledgeleader.com/what-is-intellectual-property-and-what-are-the-risks

  8. https://www.raconteur.net/business-strategy/risk/importance-intellectual-property/


Copperpod helps start-ups, corporations, and law firms deepen the technical arguments during patent prosecution, patent monetization & litigation with a detailed patentability search, prior art search, FTO (Freedom To Operate), source code review, reverse engineering, and other fact-finding analyses. Please contact us at info@copperpodip.com to know more about our services.

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Copperpod is one of the world's leading technology research and forensics firms, with an acute focus on management and monetization of intellectual property assets. With offices in US and Asia, our global team of consultants has helped clients realize over $1 billion in revenues from patent licensing, jury verdicts and patent portfolio transactions.

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