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Common IP Mistakes When Starting a Startup

There’s really no “startup” if you don’t have a stream of revenue. The major revenue stream for a new startup is the product you’re bringing to market. However, you can’t do that if you don’t own what you’re selling.

Mistakes with intellectual property issues can be the death knell of the hopes and dreams of a budding entrepreneur. Those that plan poorly, fail to plan, or try to accomplish these tasks on their own find themselves in trouble quickly: research shows that about one-third of new ventures have intellectual property issues when they go to raise money—and investors see those companies as too risky and stay away.

Many startups realize that they need to complete the appropriate filings and registrations to protect their intellectual property, but many IP problems happen in the crazy, sleepless preliminary stages. That’s when startup founders are tempted to take shortcuts that later bite them in the backside when they’re fundraising or planning for future development.

Prior to filing to protect your IP, make sure that you understand what needs to take place and your preferred circumstances, such as having your business entity and reviewing any agreements from former employers. Review some of the most frequent and most severe IP mistakes committed by startups.

I. You’re employed by another company when you begin the project. If you’re employed by a large corporation, you may have signed an employment agreement that details rules for working on outside ventures. Some companies encourage innovation from their employees—provided it doesn’t compete with the company’s main product offerings. However, there are other agreements that stipulate the company owns all products developed while on company time and while working with company resources. While you may think this to be a bit old-fashioned, it’s still totally legal, and if you signed such an agreement, the company, in effect, owns practically your every thought and any resulting invention.

Find out your specific circumstances… review your employment agreement from your current or former employer. You don’t want to pour your heart and soul into a secret invention for years—only to later find out that your employer has ownership of it. That would mark the end of your new venture and perhaps make you either take a very long vacation or pursue another line of work. Don’t let this happen: read your agreements thoroughly and speak with an IP attorney.

I. You left the old company without a separation agreement. Founder disagreements and splits occur every day in the business world. Many partners will enter into business on a handshake. This may work in the movies, but in today’s litigious society, working on a handshake can be very risky. Even so, signing an agreement concerning how you work together isn’t enough. You should have a buy-sell agreement drafted by an attorney for a potential breakup. It’s critical…even when best friends form a company, one may decide to do other things or may become ill or pass away. It doesn’t need to be a monstrous battle to sever the relationship. Other events in life can dictate the need for this crucial business protection.

“Come on, we don’t need a contract.”

That phrase is said frequently by co-founders who believe there’s no need for a complicated agreement until they raise capital, if at all. But wise investors will request to see your co-founder agreement during the due diligence process.

If you and your startup co-founder separate without a buy-sell agreement, you’ll jeopardize the viability of the company. That’s because without an understanding between the parties for a break-up, no one will be certain as to which co-founder is leaving with what and its value. The “what” could be with the company’s money-making assets or its intellectual property.

If a co-founder won’t place the IP into the company, he or she could take the product somewhere else. Startups also make the mistake of having the intellectual property outside of the entity because the patents were filed before the business organization was created. These situations can result in disagreements, litigation, and lost revenue and time fighting over patent ownership.

The ability to control and monetize patented products can be at risk if you don’t assign the patents to the company. Without doing this, each co-founder would be free to sell or license the products separately. Work with an experienced attorney to draft a business entity, co-founder agreements with buy-sell provisions, and be certain that all intellectual property rights are titled in the entity’s name.

III. You tried a DIY approach with your contracts

As Americans, we value the “can-do spirit.” Nowhere is that more prevalent than with an entrepreneur who’s building a business from scratch. Entrepreneurs are willing to try innovative ideas and to push the edge of the envelope for a chance at success. But one place where that aggressive approach can backfire with dire consequences is attempting to handle your intellectual property issues on your own.

It’s tempting for entrepreneurs to try to save on their legal expenses by using forms and contracts from the Internet. A CEO might want to try to use a license agreement that’s posted online—this has the immediate potential to save you a few thousand dollars upfront—but it risks the danger of losing millions of dollars down the road if you inadvertently give up control of your IP. For a startup, its most valuable assets are at risk unless they are properly identified and protected from the first day of business (and before).

Allow a licensed attorney to draft your agreements for contractors, employees, suppliers, and licensing and be sure to read and understand contract terms before you sign. Startups have hard enough time creating products and gaining momentum in the marketplace. Don’t shoot your company in the foot by not owning your IP. Protect it as well as your business.

Summary

Based on the type of business and industry in which your startup will be operating, you should consider patent, copyright, trademark, and trade secret protection as part of your intellectual property strategy. Sit down with an experienced intellectual property legal professional to discuss the types of intellectual property protection you may need.

Attorney Michael Ahmadshahi, PhD, focuses on patents, intellectual property, copyright, and trade secrets in Irvine, California. The Ahmadshahi Law Offices are also located in Beverly Hills and Sherman Oaks. Call us toll free at (800) 747-6081 or direct at (949) 260-4997 or email mahmadshahi@mmaiplaw.com and let us help you with your intellectual property questions and the IP strategy for your startup.

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