Entrepreneurs must understand the importance of intellectual property, especially when it comes to attracting investments from venture capital firms. Many entrepreneurs drag their feet when it comes to securing patents, trademarks, and copyrights, which can make venture capitalists decide to invest in other organizations. Intellectual property is extremely important—growing businesses need to protect their intangible assets from the very beginning.
Companies that wait to protect their intellectual property until they are seeking out investors could put the whole company at risk. After all, intangible assets can account for 80 percent of a company’s value. For early-stage startups in the tech field, this figure can be even higher, since they often have little outside of their ideas and concepts.
Below are some tips for impressing venture capitalists with regards to intellectual property protection.
1. Starting early can prevent crippling issues.
Entrepreneurs can make a number of mistakes in their first 12 months of operation that could cost them the company down the road. Issues like founding members, market validation, and initial product line are of primary concern to both entrepreneurs and venture capitalists, but investors will also look for efforts to protect intellectual property. Entrepreneurs should not simply focus on getting the necessary patents, but also on protecting themselves from risks in the future.
2. Intellectual property is property.
Venture capitalists will want term sheet clauses for proprietary information and inventions clauses that both employees and contractors sign as they prepare to make a deal. Ideally, entrepreneurs should include these sorts of clauses in contracts from the very first day of operation, in order to protect the organization should employees decide to work at another company. With high turnover rates, entrepreneurs need to ensure that they maintain the rights to all intellectual property that will generate value. This issue also applies in the event that the company is sold. Buyers will insist on clear ownership of all intellectual property.
3. Professionals can help avoid problems.
When venture capital firms are completing due diligence on a potential investment, they will likely hire professionals with expertise in relevant disciplines to review intellectual property portfolios and positions, especially if intangible assets are a major part of the company’s value. Startups can also hire professionals to help ensure that their position is secure and to plan for the future.
Sometimes, entrepreneurs file early for provisional patents and then fail to secure proper protection, especially in the international arena, because other operations take precedence or they do not have enough money. Professionals can outline the entire process and provide a realistic financial estimate for securing necessary intellectual property assets.
4. Startups should own their intellectual property.
Sometimes, it is tempting to place intellectual property and licenses in the name of founders rather than the startup itself, but this can expose the company to risk if the founders leave on poor terms with the company. Venture capitalists may worry about this scenario because it means that the founder is irreplaceable, which gives him or her a great deal of power. Ultimately, startups should own or license intellectual property unequivocally and in the company’s name. This reduces the risk of a lawsuit by any former employees, including founders, and protects against charges of infringement on someone else’s patents.
5. Intellectual property protection has its limits.
It’s possible for entrepreneurs to become too concerned with intellectual property—to the point that they become paranoid. There’s always a risk when you put your ideas out into the world, but entrepreneurs must be able to trust the people they hire and work with. Diligence is necessary, but paranoia can sever relationships with investors as well as talented employees, contractors, and business partners. When startups begin asking for non-disclosure agreements (NDAs) for every conversation, they’ll likely run out of people willing to help them. In addition, entrepreneurs should accept that most venture capitalists will never agree to an NDA, and insisting on it could become offensive very fast. The best way to protect property is to be cautious, clearly identify the risks going into any new situation, and ensure that excellent legal counsel is available.
Dealing with Angel Investors
Not all investors come in the form of venture capital firms, and entrepreneurs may wonder how angel investors—another major source of startup capital—deal with intellectual property. In general, angel investors fall into two camps. The first camp will take bets on companies with very little due diligence and only preliminary investigation into the target company’s intellectual property.
However, many angel investors will want to know exactly how protected the company’s intellectual property assets are. These angel investors understand that provisional patents and pending lawsuits do not provide the sustainable competitive advantage that they seek.
Angel investors in the second camp want to understand that all claims to intellectual property are legally sound, especially if these intangible assets are a significant part of the company valuation. In these cases, entrepreneurs face many of the same challenges that they do with venture capitalists, except that the weight of proof falls on the company’s shoulders, making legal due diligence even more critical.