One of the most important and overlooked areas of your startup is intellectual property. It's often your most important core asset and the difference between your success and failure in the market. But the question is whether your startup is managing your IP the right way to succeed in the commercial marketplace. Get it wrong, and your startup could be doomed to failure.
Here are top 4 fatal IP mistakes and how your startup can avoid them.
1. Failing to Protect the Right IP Assets
Failing to protect your intellectual property properly can cost you more than just your IP.
Xerox made this fatal mistake when they failed to patent their user mouse and graphic user interface. The result was nimble competitors who capitalized on this fatal mistake and quickly generated tens of millions of dollars using Xerox's innovation.
Too often, startups miss opportunities to increase the potential return on their IP by failing to protect it and use it to generate revenue through licensing. Making the most of your IP assets requires routinely identifying and protecting them. Protecting your IP prevents others from trading on your hard work and allows you to fully capture the return on your investment.
Protecting your startup's technology is especially important from an investor's perspective. One of the first questions investors will ask you is what's your IP position. If your startup has little or no revenue, your IP represents the biggest part of its value, and it's an asset that sets your startup apart from the competition.
Identify all the different types of IP created by your startup and then decide which ones are the most commercially viable. Remember, your IP is more than just a patent or trademark. It includes everything from your new ideas to promotional materials or even your sales process. Focus on protecting the most valuable parts first. Then continue updating your protections with new filings, such as patent continuations, as your IP is developed.
2. No IP Strategy
A second fatal mistake is failing to have an IP strategy. Without an IP strategy, you risk making the wrong move with your IP, missing revenue opportunities, or worse, losing control of your IP to competitors because you lack a system to combat infringer's.
For example, giving an exclusive license at an early stage in your product or technology development can stop your startup in its tracks. In a rush to get your product launched, you signed an exclusive agreement without the right controls and limits on your licensing partner. Because you didn't have an IP strategy, you didn't think through how exclusivity will impact your long-term business strategy. Much later, you realize you've got to renegotiate the agreement because your revenues are growing and you want to expand your product sales into new markets. But now you're stuck trying to get your rights back for those markets.
Your IP strategy details how you'll use your intellectual property and convert it into profits. It's part of your business strategy and it documents how you'll manage and protect it, and use it to support your startup's short and long-term goals. But if you don't have an IP strategy, you can wind up making the wrong moves that prevent you from using your own technology or worse costing you new revenue opportunities.
3. Not Using a Work-For-Hire Contract
The third big mistake is failing to use a work-for-hire contract to make sure your IP stays your IP.
Startups with limited resources often turn to outside consultants and contractors for everything from product development to IT systems. Done right, and these outside consultants help your startup grow. But just because these outside consultants work on your projects doesn't mean your startup owns all the IP rights.
For example, you hire a developer to work on your software, but you don't have them sign a work for hire agreement stating that anything they develop belongs to your company. Then one day after you've successfully launched your software into the market, you get a letter from the developer telling you that you're infringing on their IP.
Just ask Mark Zuckerberg. He hired a web development contractor in 2003 who, in 2010, filed a lawsuit claiming 84% ownership in Facebook as a result of that project.
Make sure you're not overlooking the work-for-hire agreement so you don't wind up losing control of your intellectual property or worse, facing potential legal action to get your IP rights back.
4. Failing to Keep Your Trade Secrets Secret
Every successful startup has trade secrets – a method, formula, device, process or any information that gives it a unique competitive advantage over its competition. Sometimes it's the trade secret alone, or in many cases, it's the combination of trade secrets and other IP, such as patents. Not only are your trade secrets important to your startup's growth, it's very life could hang on them.
Some of the most highly valued companies in the world are built on trade secrets, such as the Coca Cola formula, the Kentucky Fried Chicken recipe, and Google's algorithm. Unlike other types of intellectual property, you can't get protection by registering your trade secret. Instead, protection lasts only as long as you control disclosure and use of the information.
Without the right procedures in place, an employee could take your trade secrets, such as a customer list, to start their own business. A UK company wound up suing a former employee for stealing their customer list. The employee copied the business cards of clients and then added them to their Linked-In account to pitch their new business.
In addition to customer lists and related data, many other forms of information are protectable as trade secrets. These include business plans, research and development data, product manuals, people information, designs, blueprints, schematics, ingredients, formulas and manufacturing techniques.
If you don't protect your trade secrets – keep the information confidential and require your employees and outside contractors to sign a non-disclosure agreement – they can walk out the door with it. And that could be a recipe for disaster especially if it's the foundation for your technology or products. Now your stuck trying to figure out how to keep your IP rights intact without having to face a lengthy legal battle or wind up paying royalties on your own IP.
You've invested a lot of money developing your intellectual property . The question is what are you doing to get the biggest return on that investment? Your IP is the biggest part of your startup value, and investors favor startups with solid IP and a strategy to capitalize on it in as many ways as possible. Credible IP assets strengthen your startup's likelihood of obtaining financing from investors because of the sustainable competitive advantage and higher expected returns if offers.
But if your startup isn't taking any steps to protect its IP assets and develop an IP strategy, these mistakes can cost you your startup. They can be the difference between investors giving you money or pulling away at the last-minute, which can be fatal for your startup.
Rand Brenner is an IP professional whose passion is helping inventors, startups, and businesses of all sizes use licensing to turn their IP into income-producing products, services, and technologies. His decades of experience run the gamut from medical devices to food technology to consumer products. He's licensed some of the biggest Hollywood entertainment blockbusters including the Batman Movies (1 and 2), and the number one kid's action TV show, the Mighty Morphin Power Rangers. Rand speaks about licensing and is a featured speaker at investment conferences, trade shows, colleges, and startup events. His first book, Hidden Wealth: The Money Making Power of Licensing was released in 2019 and is available on Amazon.com. He's also a published writer with articles appearing in several prestigious trade magazine including The Licensing Journal, Intellectual Property Magazine, and License India. Rand also mentors at the Cal State Fullerton School of Business and Economics and is a judge for their startup business plan competitions.