Starting a New Company? Protect Your Intellectual Property Now or Maybe Never

When getting a startup off the ground and in the course of ongoing operations, it is important to take care of some fundamental housekeeping matters.  The failure to do so can result in problems that could be costly and/or difficult to resolve later.

Incorporation
Steps should be taken to incorporate early.  The entity form and jurisdiction should be discussed with legal counsel so that appropriate tax and legal issues can be considered.  When more than one individual is involved, the terms of an operating agreement that address contingencies and matters of corporate control should be discussed at the outset. Some firms offer special fee arrangements for startups which can be attractive.  This firm, through the PRETI FLAHERTY BUSINESS LAUNCH PAD ™, assists in the formation of new ventures under certain guidelines.

Employment Agreements
All employees, members and key individuals of the company should be required to execute confidentiality and assignment agreements.  These agreements should address basic obligations to the company including the obligation to maintain sensitive company information in confidence, the obligation to assign intellectual property to the company, an identification of pre-existing intellectual property of the individual, non-compete obligations, non-solicitation obligations with respect to customers and other employees and assurances that the employment will not conflict with any prior obligations of the employee.  A failure to enter into such agreements upon the formation of a company with key personnel can result in claims that the company does not own its intellectual property or claims that the company does not possess the exclusive rights to its intellectual property.

Consulting Agreements
Frequently, startups need to rely on other parties for expertise in specialized areas.  Prior to the commencement of work with any consultants, a consulting agreement should be put in place that provides, in addition to a work statement that addresses the specifics of the undertaking and compensation arrangements, obligations of confidentiality of company information and information developed in the course of the undertaking, a right of use with respect to any intellectual property of the consultant embodied in the deliverables, obligations to assign intellectual property developed pursuant to the agreement, an agreement not to solicit employees of the company and assurances that the undertaking does not conflict with any prior obligations assumed by the consultant.  Absent an express agreement with consultants, disputes regarding the ownership and use of intellectual property developed by the consultant can arise.

Filing of Patent Applications on Inventions
As a result of changes in the patent law over the last several years, the party who first files a patent application for a particular invention in the US typically has superior rights over parties that file later. For this reason it is advantageous to pursue the filing of patent application on subject matter that is perceived to be of commercial value as soon as the basic ideas are sufficiently defined when patent protection is available.  When a startup pursues funding, a sale of the company or an initial public offering, it is inevitable that one of the checklist questions that will be asked is whether patent protection has been pursued so as to establish a barrier to entry of the marketplace by competitors. Frequently, the initial patent application filed will be a provisional patent application in recognition that the technology may evolve in the initial one-year period after the filing of the provisional application by which time a non-provisional application must be filed to preserve the priority date of the provisional application.  A failure to file a patent application within specified periods can result in a bar to a later filing and a loss of an ability to pursue patent protection which can detract from the perceived value of the company.

Name Clearance and Filing of Trademark Applications for Significant Trademarks
Prior to formalizing and registering a corporate or other entity, a name clearance search should be undertaken to determine if objections are likely to be raised by others with respect to the use or registration of the name by other business entities.  The costs associated with such clearance searches are generally considerably lower than the costs associated with changing a corporate name and rebranding activities that must be undertaken if a name change is later required due to a conflict with a preexisting business. Since at the outset most startups will not have used any marks in interstate commerce, they should consider filing applications for federal registration of significant trademarks based on an ”intent to use” the mark(s) in the future.  If it is determined by the U.S. Patent and Trademark Office that a mark is registrable, a Notice of Allowance is issued.  Once the mark is used in interstate commerce, a statement of use is filed and the registration is issued.   The inattention to the filing of trademarks can result in the adoption and registration of the marks by others and an inability to use the marks in conjunction with the business of the company.
 
Use of Non-Disclosure Agreements
Discussions with parties outside the company should be undertaken pursuant to non-disclosure agreements.  Such agreements obligate the recipient of confidential company information to maintain the information in confidence and limit the use of such information solely to the limited purpose specified in the agreement.  The failure to utilize non-disclosure agreements when disclosing sensitive company information to other parties can result in the loss of the right to file patent applications on inventions of the company in certain circumstances, the use of the company information in a manner adverse to the company, or the public disclosure of information that the company desired to maintain in confidence.

Should a startup pursue external funding or get to a point at which it is considering a liquidity event, due diligence investigations will be pursued to ascertain whether the company has taken appropriate steps to protect its intellectual property assets. A failure to assure that the above-identified housekeeping matters have been appropriately addressed can adversely affect the valuation of the company or the ability to achieve desired funding.