With every new business enterprise or venture, plans are constantly revised, changed, modified, and sometimes even completely scrapped in favor of a fresh start. There is no way to avoid mistakes. But when mistakes involve intellectual property matters, it can leave a lasting mark on a young startup that can be difficult to overcome. Although start-ups are often penny-pinching operations held together by shoe-string budgets until getting adequately funded, skimping on reliable intellectual property guidance can be pound-foolish. Here are some of the most common mistakes that new startups, founders, and entrepreneurs make concerning intellectual property matters that can have some of the costliest and messiest clean-up efforts.
Mistake No.1 – Failing to Research Existing Competition.
By far, one of the biggest errors that startups and entrepreneurs make when setting up shop is failing to properly ferret out whether there are competitors with similar prior inventions, trademarks, patents, copyrights, and other pieces of intellectual property. Identifying similar products, services, goods, and concepts are not only important for shaping the direction of the startup and its usefulness in the marketplace, they can help determine whether you have the freedom to operate and whether your inventions, marks, and goods are unique enough to qualify for intellectual property protection by the U.S. Patent & Trademark Office. Failing to conduct a sufficient professional investigation can result in being accused of “willful” infringement, if the start-up’s products turn out to be infringing, resulting in exposure to punitive and triple damages. For inventions that can be patented, failing obtain a patent clearance opinion can also be a roadblock to raising capital. A broad and comprehensive search and opinion is not as expensive as one may think – for $500 – $1,000 and the retention of a firm that understands the needs of start-ups, in many cases, entrepreneurs can help eliminate early headaches for their budding companies by getting adequate searches of marks and new inventions.
Mistake No. 2 – Waiting Too Long.
Most entrepreneurs I speak to are almost always shocked to learn that a patent application must be filed within one (1) year of the first printed publication, disclosure, or offer to sell the product. The 1-year rule operates as a complete bar, and cannot be extended. The problem is that in many cases, a startup’s most unique and novel developments are often produced in the very beginning of the company’s formation, or even prior to the company’s formation. Further, the U.S. is now a “first to file” country, which means that if a founder waits too long to file a patent application, he or she may lose the race completely, even if it is invented first. Further, most countries have no grace period between when an invention goes public and when a patent application must be filed — so if your invention goes public or is made available for sale or displayed at a trade show before the patent application is filed, all patent rights outside the U.S. are immediately lost.
Mistake No. 3 – No Strategy.
Another common and expensive mistake that startup can make is acting without a comprehensive strategy. Too often, startups rush in, spending needless funds preparing patent applications that are too narrow, poorly-drafted, or do not adequately bar entry by competitors. Failing to obtain guidance and counsel before initiating the application process can result in the expenditure of unnecessary fees on fruitless IP protection. In some cases, companies could even spend time and money patenting inventions that really have nothing to do with the company’s core product or most novel invention. Not every technological advance can or should be patented — even if clever, unique, or innovative. The purpose of the patent should be to protect the business’s revenue and market-share, not to boost the ego or recognition of the founder. Not every invention can become the basis of a profitable business.
Mistake No. 4 – DIYing Core Documents.
It is hard to break some traits in serial entrepreneurs — but DIY mentality can be as much of a gift as it is a curse. Wise entrepreneurs, however, know what can be accomplished without help, and what tasks truly need professional help. Unfortunately, because young companies are usually cash-strapped, it can be difficult to allocate precious resources on legal, tax, and business advice rather than relying on online templates, forms, and of course, the infamous cookie-cutter form website LegalZoom. The problem is that improper DIY preparation of core documents can be a very expensive mistake to fix. I have worked with a number of founders and entrepreneurs that relied on document-preparation services to prepare their core documents only to find out that they will have to spend 2-3 times that amount to fix the mess created through the online service. Legal, tax, and business documents simply cannot be turned into “choose your own adventure” games, by which checklists and radio buttons will magically result in an outcome that produces kind or quality of documentation that is sufficient for a new company to grow and flourish. Too often, entrepreneurs think that they can cobble together the basic core documents, and then pay for professional help only after they get some traction and funding. But by then, it is often too late. Think of it as building a house that needs a solid foundation. It’s not a Lego-house, so you won’t be able to rip out and re-pour the basement foundation 5 years after building it — you’ll have to re-build your entire house.
Mistake No. 5 – Chain of Title and Ownership.
Startups and entrepreneurs must also take care to protect the chain of title of their inventions, and avoid problems encountered from not knowing who owns what. In many cases, key technology or inventions are developed long before the company actually comes to life. Termed the “Zuckerberg” problem (since Mark Zuckerberg never assigned his IP rights to the original company that he founded with Eduardo Saverin, and instead, when the two had a falling out, formed a new company and assigned his IP rights to that company), expensive mistakes can occur when companies fail to ever properly assign the intellectual property developed by the founders to the company itself. Angel investors or venture capital firms conducting due diligence on a company will surely investigate whether the company owns the pre-existing technology, and if the company does not, it could scare away investors. Assignment issues can also arise when outside consultants, independent contractors, and developers are hired — not to mention friends, colleagues, or acquaintances living in a dorm hall, like the Winklevoss twins. Failing to obtain work-for-hire agreements and other agreements to ensure that the work authored by outsiders is the property of the company can result in disaster, as everyone will scramble to get a piece of the if the startup becomes a huge success. Consequently, startups and entrepreneurs should make sure that all intellectual property is properly assigned to the company when the company is formed so that stock can be issued in exchange for the assignment, and all potentially loose ends claiming ownership to the company’s intellectual property are tidily cleaned up.
Mistake No. 6 – Failing to Protect Trade Secrets.
Unlike copyrights, trademarks, and patents, there are no federal application procedures to protect trade secrets — it is the startup’s job to protect information that it considers valuable and confidential. Confidential information can include programs, techniques, methods, processes, customer lists, pricing information, and non-public financial data, to name a few. Just about anything that can be used against a company to its detriment in the marketplace should be afforded the greatest care and secrecy. In many fields and industries, the marketplace is already crowded — the misappropriation of confidential information about a company’s margin, pricing lists, or customer lists can cut short the lifespan of a a promising young startup. The solution is an airtight non-disclosure agreement or similar type of confidentiality agreement. A professionally prepared document is the safest and most reliable route, as forms found on the internet are often poorly drafted, internally inconsistent, and in some cases, even contradictory.
Mistake Mistake No. 7 – The Right Name.
The best startups and companies are those with catchy and memorable company names, product names, service names, trademarks, and other intellectual property. It can take years and years for gibberish-branded companies (Google, Hulu, Moodle, our countless others.) to earn name recognition among a mass audience. On the other hand, the right company name, logo, or trademark can convey the company’s field, industry, and product sweetly and succinctly — if proper thought and time are put into the selection process. One of the biggest mistakes entrepreneurs make is in hurrying the process along too quickly. It takes time and creative energy to come up with the right slogans or names for products, services, or companies. Often times, it is not a task that a single individual can accomplish — and the right idea will often be spontaneously conceived by a group of colleagues in settings as mundane as the building’s lobby coffee shop on a Wednesday afternoon. Don’t hurry the process along — all good things take time to develop.
Mistake No. 8 – Overusing Overseas Help.
In many cases, startups rely on outsourced help for a variety of developmental, operational, administrative, and marketing tasks. But there are great risks that come along with putting valuable information in the hands of overseas contractors, service providers, or suppliers. There are few places overseas by which cheap labor can be obtained for which an adequate legal justice system exists to detect and combat IP theft. Entrepreneurs should also be wary of using freelance sites like Elance, O-Desk, or others. The fine print in the user agreements for such sites may be more than what founders bargain for, — especially when relationships that begin on such sites expand “off-site” and through a relationship between the contractor and freelancer directly. In such circumstances, when the freelancer is overseas or abroad, there is very little hope of holding them accountable for mistakes or misrepresentations on a project gone awry.
Mistake No. 9. Moonlighting.
What do most entrepreneurs do while working on their great new invention? Work 9-5 (or longer) to put food on the table and pay bills, of course. However, problems arise if entrepreneurs use their employer’s facilities, computers, equipment, or technology during company time to develop their products, services, or new invention. Nearly all employment handbooks and employment agreements require employees to turn over and assign all intellectual property rights to the employer during the term of employment, especially in the tech sector. When a new startup or idea is conceived even partly at the employer’s facilities during work hours, it can lead to ownership disputes down the line if the business becomes a success.
Mistake No. 10 Open Source Software.
Who doesn’t lift a few lines of open source software to accomplish basic tasks from time to time? Unfortunately, the use of open source software components can be like a poison – contaminating an entire project and requiring the entrepreneur to disclose the source code to competitors and preventing the invention from qualifying for intellectual property protection. Resist the urge to pick the low-hanging fruit of open source code software… you will thank yourself years down the line.
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