Intellectual Property Creation and Startups

Part 2 in a series in Startup Stages

The underpinning of most technology based startups is the creation of intellectual property (“IP”) in the form of patents, trademarks, and trade secrets (including proprietary designs, software, process recipes, etc.). Yet surprisingly, many technology startups manage this poorly. Management must be diligent in avoiding IP risks, which include:

• Loss of IP rights through failure to obtain proper assignments
• Loss of IP rights through failure to adopt or enforce a lab notebook policy
• Disclosing too much proprietary information in provisional patent applications
• Loss of trade secret rights and foreign patent filing rights through disclosure of the startup’s secrets without an effective non-disclosure agreement
• Breach of non-disclosure obligations through disclosure of a third party’s trade secrets to outsiders
• Misappropriation of the trade secrets of others, especially prior employers
• Infringement of patents and trademarks owned by others
• Having to change the name of the company or its products after brand equity has been built up, due to trademark infringement

The administrative overhead required to manage these risks include:

• Non-disclosure and invention assignment agreements and the associated business processes for their execution and tracking
• Business process for the keeping of lab notebooks, mining of patentable inventions, review of invention disclosures, and filing and prosecution of patent applications
• Employee education regarding the creation and protection of intellectual property
• Patent “clearance” searches prior to significant investment in new products
• Trademark searches to ensure that company and product names do not infringe the trademarks of others

Because trade secret law requires that the owner protect the confidentiality of its trade secrets, it is particularly important to have non-disclosure agreements in place before discussions with key vendors, independent contractors, and employees. In the case of vendors and contractors doing custom work, those vendors and contractors should execute, in advance, agreements assigning to the company any IP they create in connection with their engagement. Don’t assume that because you paid an engineering design firm to do contract work for you that you own it; you’d be surprised what the fine print might say.

A Cautionary Note About NDAs
Did you know that signing a mutual non-disclosure agreement can potentially:

• Impair your ability to commercialize your own inventions?
• If used indiscriminately, impair your ability to claim trade secret status for your legitimate trade secrets?

To minimize this risk, be selective with whom you sign NDA’s and use one-way non-disclosure agreements where possible.  For more about the ins, the outs, and the limitations of NDAs, see my post on What Every Entrepreneur Should Know About NDAs.

So what's the best way to deal with these issues?  If intellectual property is an important element of your startup, hire a good lawyer.  This is not the place to pinch pennies nor does it necessarily mean using one of the big law firms.  Look for an intelletual property lawyer with domain expertise in your technology area.

At this stage of the startup’s life, the compliance and risk management issues are relatively straightforward to manage. However, these escalate significantly in terms of complexity and downside risk as the business begins to issue contracts and hire people.

Next post:  Purchasing Goods, Services, and the Thorny Issue of Independent Contractors.

Related posts in this series:
The "Nitty Gritty" of Startup Formation