IP considerations for start-ups

Published on: 03 December 2014
by Ms. Roxana Sullivan, Attorney at Law at Dennemeyer & Associates, Chicago

Two sides of the entreprenorial coin

In this article, we take a look at how start-ups can safeguard their brands and how venture capitalists can best protect their investments with a good IP strategy.

For both sides of the entrepreneurial coin, start-up companies and venture capitalists (VCs), due diligence is a key component. Due diligence is a company investigation conducted any time a company is acquired, an investor plans to invest in a company,  venture financing is considered, or an initial public off€ering is made. Below, we focus on IP considerations that VCs need to take into account when performing due diligence and what start-ups need to examine to position themselves for investment.

A review of IP assets should be taken by all start-ups, regardless of the type of IP assets they own. For example, companies in the pharmaceutical, medical device or biotechnology fields regularly protect assets with patents or trade secrets and develop valuable trademarks as they go to market. For other start-ups, such as web-based technologies focused on user experience, patents can be less important than strong copyright and trademark portfolios. In either case, it’s in the best interest of the start-up and the VC firm to examine the IP portfolio as a whole.

Due diligence

There are four main factors a VC firm needs to consider when performing due diligence. First, it’s important for a VC firm to verify that all IP assets have been assigned to the company and to review any licence agreements concerning the IP. If the chain of title regarding the IP in question is messy, then the valuation, and later monetisation process, will prove to be complicated at best. VCs should examine the agreements in place to ensure that employment and consulting agreements establish IP ownership in the  start-up. An examination of the start-up’s licence agreements can also help estimate future royalty obligations.

Second, VCs should consider the measures taken to protect the IP. Have proper forms been led for patent, trademark, and/or copyright protection? Was an attorney used to prepare and file these forms? Have maintenance fees been duly paid on the IP assets?

Third, examine the company’s trade secret protection measures. Have non-disclosure agreements been utilised if the start-up worked with outside companies or individuals to develop the technology? What other systems are in place to ensure that proprietary information stays protected?

Finally, VCs must identify competing third-party technology and whether any claims exist against the company’s IP. This analysis is used to determine if there are third-party patents that could block the technology in which the VC firm is interested in investing. It can also determine if infringement actions are likely in the future.

Read the full article in the World Intellectual Property Review magazine - November/December 2014 issue - PDF article attached.