IP Mistakes Startups Make That Could Jeopardize Your Angel Investment

Posted by Pierre de la Fortune on April 16, 2015 @ 12:01 a.m.

Written by Joey Lo

In Part 1 of the interview, Implications of IP for Angel Investors, patent attorney Tom Williams (@RealGTom) of McGarry Bair (@McGarryBair) provided a summary of various forms of intellectual property (IP) and explained how IP produces money-making opportunities.

Here, heíll talk about several common mistakes startups make, provide an overview on IP insurance, and point out why most startups donít have such insurance. Common IP Mistakes Companies Make

IP is one of the most important considerations when seasoned investors evaluate an investment opportunity. They want to make sure the potential investee 1) hasnít infringed other companiesí IP and 2) has taken reasonable measures to defend its competitive edge by protecting its IP.

Looking at some of the most common IP mistakes startups make could provide insights into how they might jeopardize your investment.

Williams points out that startups often * become married to their name before undergoing a trademark adoption or clearance process; * donít have a clear idea of how their concept differentiates them from the marketplace and, technologically, from prior products/services; and/or * fail to resolve IP ownership issues early on in their development Ė and ending up not owning 100% of their IP.

If the startup outsources code development or other content to a third party, the startup should have agreements in place to address ownership. As Williams notes, ďoutsourcing can create ownership in that third party.Ē You want to make sure your investee, not the third party, owns the IP.

And if the startupís patent attorney is hired based on low fees, it might imply that the IP counsel isnít properly compensated ďto spend enough time to adequately evaluate the IP and place appropriate protections in place,Ē he continues.

As an IP-conscious investor, you may want to clear the above with the potential investee before making your investment decision.

Worst Mistake

Whatís the worst mistake of them all? William says itís disclosing or discussing the product openly before seeking legal advice from a qualified IP attorney.

He explains: In the United States, companies have a year from the first disclosure or offer for sale to file a patent application. But in some countries, any disclosure before filing will forfeit their patent rights. Sometimes, even a pitch to an investor, which discloses enough of an invention, can compromise US and foreign patent rights. This means that once the founder/inventor has put its invention/technology in the public domain, such as pitching to you and other investors, thereís a chance that itíd invalidate the patent application.

It sucks to know that the product you totally dig might not receive IP protections in the future, all because the startup hasnít filed a patent app before her pitch. At the minimum, the company should have filed a perfunctory provisional patent application, suggests Williams.

Reciting some of the unfortunate meetings his firmís had with clients, Williams shares: Some of the worst meetings I can remember are ones where an inventor has made a fatal disclosure of an invention before protecting it and we have to tell the inventor that his/her invention is free for the world to use. Ouch.

Intellectual Property Insurance IP insurance typically insures against lawsuits by a companyís competitors. It provides a vehicle to assist and/or fund the prosecution or defense of IP-related infringement lawsuits, shares Williams. But if youíre thinking about requesting potential investees to obtain IP insurance, we suggest you not to bother.

Williams comments: Insurance coverage can be expensive. Many startups simply donít have the resources to put towards one or more policies. Even if they do, they often get rejected because of the speculative nature of their new market or product, or the existence of a substantial competitor in the market.

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