March 10, 2021
-
10 minute

How should founders approach intellectual property when building their startup?

Venture Building

Once you’ve come up with a great idea, the next steps can feel overwhelming. Do you focus on developing an MVP? Finding a co-founder? Hiring employees?

The answer might be “yes” to all of these, but before you get started, it’s important to consider how you’re going to protect your idea. You need to have what’s known as an intellectual property (IP) strategy. This strategy helps you get from Point A (a person with a great idea) to Point B (a business with a legal claim to that great idea and the freedom to capitalize on it). 

Of course, all of this can feel overwhelming, especially in the early days of your business when you don’t have unlimited funds for a legal team. To help you understand how to plot your path forward and make key intellectual property decisions, we spoke with two IP experts in the Canadian tech ecosystem. 

  • Horia Tabatabaei Soltani, J.D., CIPP/C is a lawyer at GoodLawyer who specializes in business, privacy, and data protection law. GoodLawyer helps entrepreneurs get the expert legal advice they need by providing upfront pricing for common and critical services such as incorporations, contract reviews, shareholders’ agreement writing, and more. Tabatabaei Soltani also practices through her firm, HTS Law.
  • Jim Wilson is Senior Manager of Intellectual Property at Innovate Calgary, the innovation transfer and business incubator centre for the University of Calgary. In his role, Wilson works with inventors from the University of Calgary and the Calgary life sciences community to secure, manage, and market new technologies. 

Disclaimer: This article is for educational purposes only and should not serve as a substitute for formal legal advice. These responses have been edited and condensed for clarity.

What exactly is intellectual property?

Horia: Very simply, intellectual property is a new invention. It can be a creation of your mind, a symbol, or a product. The most well-known types of IP are patents, copyrights, and trademarks. Patents usually have a timeframe for their standing while trademarks and copyrights have no expiry on the ownership – you just have to renew your registration of that IP. 

There are lesser known types of IP, specifically for things such as industrial design and integrated circuit topographies. These are very specific to certain markets and products. 

Then there are trade secrets. Trade secrets are not protected by an official registration. You don’t put in an application. A trade secret is something that is private and important to a business’ success and its competitive edge in the market. You protect trade secrets through non-disclosure agreements and use them with other strategies to ensure the secret is not leaked outside of the company. A good example of a trade secret is the Coca-Cola recipe. 

Jim: Yes, as Horia says, intellectual property is defined as “creations of the mind” and now policies are catching up to clarify that this is creation by human minds. The U.S. Copyright Office clarified this in 2014 because of the “monkey selfie” and also clarified that machine generated works are not subject to copyright, which is important for emerging AI-generated music, pictures, and writing. Similarly, a recent US patent application was rejected because it had an AI agent as the inventor. The Canadian Intellectual Property Office has recently built some great educational resources such as webinars, an IP toolkit, and an IP Hub which can help a founder quickly learn about their intellectual property opportunities.

How important is IP for securing future rounds of funding? 

Jim: Intellectual property is an important asset when looking to the future, trying to secure a solid market position, and incentivizing investment in the early stages. Investors are often interested in supporting startups with a well-defined and differentiated product or service. And intellectual property is the established legal framework to recognize innovation, and in turn, that makes startups with IP attractive for investment. 

Around 50 percent of patents eventually issue. Given the uncertainty of starting a company, an intellectual property strategy might be one of the areas of greatest certainty. 

What can startup founders do to lay the groundwork for an IP strategy?

Horia: First, do market research to see if there’s anything out there that is similar to your product or has the potential of growing into something similar to your product. If there’s nothing out there this is meaningful, because your idea is very new, you have an extreme competitive edge and should look into protecting this idea.

Second, if your idea is abstract, see how you can make it less abstract through development. If you pursue a patent too early, your abstract idea may later develop into something other than what you planned. 

Third, before you proceed with a patent application, you should conduct a patent search to gain an understanding of similar products that have an application submitted, pending, approved, or halted. 

Once you’ve passed all of these steps, consider consulting with an IP lawyer to figure out the best IP strategy for you based on your business strategy. Then, take the jump into working with a lawyer on a patent application. Patent applications are expensive, time-consuming, lengthy, and detailed. 

You also have to consider how you want to protect your patent. Do you want to do it domestically? Internationally? For specific countries like the United States? 

Doing your market research will help you answer these questions. And meeting for at least a consultation with an IP lawyer will help you break down your product. That lawyer can take a look at what you have so far and suggest specific steps to make the prospect of a patent application better. 

How do entrepreneurs who are still working for another company protect their ideas from being claimed by their employer?

Horia: Ask yourself, “Am I working on an idea that can be in competition with my current employer?” If so, don’t work on the product or idea on the employer’s time, and don’t use their resources. There’s a common understanding that what an employee develops in the course of their employment is the IP of the employer. But what the employee creates outside of their employment is owned by them and not their employer.

That said, if you want to use your employer’s time or resources, get their permission and document it. That documentation should detail which resources you’re using, how much time you’re spending on that project, how much time you’re spending with specific resources, and as many other details as possible. 

You also want to take a look at your contract for provisions, such as non-compete clauses, which outline what you can and can’t do. You want to make sure that there’s no way for your employer to later say, “Hey, this is my product!”

How should you protect yourself when working with co-founders?

Horia: You need to have a co-founder agreement. The first step to ensuring the prosperity of the business – and individual co-founders – is to have a co-founder agreement which outlines the duties and responsibilities of each individual along with the financial breakdown and business decision strategy. If conflicts arise, how are you going to solve that conflict? What’s the capital and revenue division? The jurisdiction of operation? How do you go about deciding when or how to accept certain investors or employees along with any other challenges that come up? 

A co-founder agreement is very detailed and very important. It shouldn’t be overlooked. It's the first step of getting your startup “up”. The more documentation you have, the better protected you are. Never move forward on the basis of, “We’re best buddies.” I even recommend that when family members start a business they have a co-founder agreement. It doesn’t matter what your relationship is right now. As the business develops, people may have different ideas of how they want to develop that business and conflicts will arise. You need to have a mechanism in place to help you mitigate any conflicts that come up. 

Another important thing that should be addressed in the co-founder agreement is intellectual property. Who has the right to the IP? If one co-founder developed it, do the others also have a right to it? If yes, how is the ownership divided? On what grounds? 

To ensure the longevity of a business, it’s important to consider giving the IP ownership rights to the business itself rather than the founder, because if the founder leaves, then the IP leaves with them, leaving the business in trouble because they don’t have the right to the product that the entire business is built upon. 

How do you protect yourself from theft when employees or subcontractors join your team?

Horia: Contracts! These can take a variety of forms. One of the most practiced ones is a non-disclosure agreement or non-compete agreements. In your employment contracts with employees or subcontractors, you should have a clause that states that the IP created by them is the company’s intellectual property and that once the project is complete, they return all rights and products to the company. You should also include a confidentiality clause that ensures they don’t speak about the product to anyone as well as a non-compete clause that ensures they don’t go to your competitors and say, “I just worked on something similar. Let me help you out!” 

How do founders balance protecting their IP with their budget realities and constraints?

Horia: It’s not an easy decision, especially when you just want to get the ball rolling and start your business. There isn’t a straightforward answer that fits all scenarios and companies. What startups should do is look at their business product and assess what parts of their product or service they should protect. Let’s say their product is a new software, and they’ve gone through the process of doing their market research and their patent research. They’ve determined that this software is their sole competitive edge and what brings in revenue. They should consider patenting it right away. The value proposition of the patent to the company needs to be considered. Because if you don’t patent your product and just put it on the market, there’s the chance of losing your competitiveness. So you have to do a cost benefit analysis at the beginning of your business. 

If someone comes along and copies your invention, you’re in trouble. The amount of time and money you will have to put into getting your right to that product back is going to cost more than the time and money you would have put into getting that patent in the first place. 

When should you start thinking about an international IP strategy?

Horia: It’s good practice to start thinking of your international patent strategy the moment you start thinking of your domestic strategy. That doesn’t mean you have to execute on one right away. But by thinking about it while developing your overall patent strategy, you create a better, more detailed outline of what you need to protect now, why you need to do it, how to start, and what you can add later on. This gives you a plan to work towards and a plan to structure your finances on, so you’re prepared for future expansions. 

It’s also important to speak to someone and obtain advice on your IP strategy, because they may bring up things that you have not considered. You may think something is important – “I need to patent internationally! That’s the only way!” – and they may say, ‘Actually you don’t” or “Yes you need to, but here’s how you should actually do it” or “Canada’s not the jurisdiction you should patent in first. Maybe consider the U.S. and later file a patent in Canada” because the market for your idea is larger and more competitive in the U.S., making protection there more valuable and urgent.

How do legal teams need to evolve to keep up with technological innovations?

Horia: Legal teams need to constantly enhance their legal and technology knowledge. Technology evolves at a speed that the law cannot and does not keep up with. Legal teams through their review and engagement with developments in their market and within their own business can be ahead of the game and be mindful of potential issues that can arise and create a forward thinking legal strategy for the company. The legal team – in house or external – should also consider working closely with the development and engineering teams of the business to get a better understanding of the product or service that they’re providing as well as the products and services out in the market and the shifts that are happening. This requires constant upskilling and collaboration. 

Jim: Consider engineering. It used to be that drafting and design were two separate disciplines. With the emergence of computer-aided design (CAD), these two disciplines merged. We’re seeing something similar with patents. There will always be a place for the legal team to go through documents or processes with their own lens, but there are new tools that make the vast patent information available to a broader team including designers, scientists, and economists. For example, there are former engineering students from the University of Calgary who now routinely look at the rich technical details in patents and build that into their technical due diligence. 

Navigating the 9,000 new patent applications each day is a big data problem with exciting new artificial intelligence tools for classification, image analysis, translation, speech and language processing, and mapping of the innovation landscape. For instance, the World Intellectual Property Organization has a robust tool for characterizing a trademark logo, the Vienna Classification Assistant. These next-generation of artificial intelligence powered navigation tools allow people everywhere to more easily find, understand, and learn from all the world’s latest innovations.

What should founders be thinking of beyond patents?

Horia: Patents are used when you want to protect an invention or discovery that’s new, non-obvious, and useful. Patents are also used and given to improve already existing patents. Examples of that include an iPhone or a drone or a chemical design structure in a cosmetic. Even packaging counts.

Beyond patents, copyright is used to protect an original work of authorship, such as work you’ve written like an article, book, or poem. The importance of copyright protection is that once you register your right, it’s yours. If anybody uses it without your permission, you have a right to file a lawsuit. It’s easier to track back the ownership of that work to you. 

In essence, with copyright, whatever you create is yours, but by putting in a copyright application you make that firm and protect yourself legally. 

Trademarks are used to protect a product phrase, word, or symbol that is associated with the product or service. Famous examples include the Nike swoosh or the McDonald’s “M”. Think of trademarks as a way to protect your brand and the service you’re providing. 

Jim: It is good to have an early focus on patents because if you have a patented new device, process, or compound, the patent might be a valuable intellectual property asset. Patent applications are also time sensitive with rights much more limited after the invention is public. Because of their value and time sensitivity, patents are one of the early aspects companies should review. But patents can be rejected, so a smart startup might have other assets like a trademarked name, trade secrets for a process or source code in the background. Patents are important, but robustness comes from having an array of intellectual property assets, aligned with their business objectives, and strong enough to create a lasting competitive advantage.

Key Takeaways

  • An IP strategy combines business development, market analysis, and law to understand what creations and inventions are critical to your company’s value proposition and worth protecting
  • An IP strategy goes beyond patents to include everything from non-disclosure agreements for protecting trade secrets to non-compete clauses to prevent employees from taking your internal tricks to your competitors
  • A co-founder agreement is essential for protecting both individual co-founders’ prosperity and the prosperity of the business
  • Ideally, co-founders should assign IP rights to the business, not to an individual co-founder in order to prevent a co-founder’s departure from irreparable harming the business
  • Both in-house and external legal teams must work more closely with product and engineering teams to understand the company’s value proposition and keep up with the rapid pace of technological innovation

For more insights and startup advice on launching and building your company, subscribe to Harvest’s mail list below.

© 2021 Harvest Builders | All rights reserved.