Intellectual property (IP) is one of the most important factors in determining the enterprise value, especially for startups. Most investors or prospective buyers decide to invest in or take over the company considering the potential value of the startup's IP. While the startup's IP portfolio may spark interest from investors and prospective buyers, it sometimes may be a factor that completely alienates them depending on whether the target company's IP is properly protected. This article gives a brief look at the steps that startups can take to protect and develop their IP.
IP Transfer, Assignment, and Non-Disclosure Agreement (NDA)
The first and simplest action a startup can take is entering into an IP transfer and non-disclosure agreement with all founders, employees, and other third-party service providers. Although the process can be carried out at no cost or time as there are standardized forms for the agreements, many startups often skip this step because they don't necessarily feel the need for such a procedure with the complacent mindset of "Mine is yours, yours is mine, and they all are ours!" However, if IP transfers and assignments to a company are not done properly, the company-owned IP may not appear externally and the company may not have exclusive ownership of the IP rights, which is important and essential to driving the business forward.
If the original IP owners are founders and/or employees, it can be resolved to a certain extent by proceeding with the ex post IP transfer or assignment (this is also required to pay separate compensation in some states because ex post facto consent is insufficient). However, it should be noted that the ownership of the IP created by technical services or advisory contracts with outside parties at the beginning of business must be clarified. Otherwise, you have to get the third parties’ consent or you may have to share revenue with the third parties in the future. In addition, certain states (including California) also restrict the scope of work that employees can transfer and assign to the company. Therefore, it is important to consult a lawyer to ensure that the transfer and assignment agreements you draft comply with the laws of the state in which your company establishes.
IP Prosecution and Registration
No matter how good of an IP is created, if you fail to obtain the right to be protected from third parties' infringement, you have no option other than letting go of the unauthorized use by the third party. Therefore, it is important to keep in mind that IP (especially patent and trademark) must be registered to be legally protected. However, because the application and the legal fee of patent attorneys are much higher in the U.S. than Korea, many startups often postpone the application until they receive investment later. Of course, if you are unsure about the benefits of the application and registration, you may want to give up your application. However, you have to decide as soon as possible after consulting a lawyer or a patent attorney, preferably before the company's initial public disclosure and no later than 1 year after the public announcement of the technology. If you consult a lawyer after delaying patent applications for technologies essential to the business thinking "Now that we have received investment and have enough budget, let's proceed with the application to the U.S.," unfortunately, there may be cases where the deadline for the application passed already.
This does not mean that filing and registering IP is the end of the process. It only means that the government has given you the right to prevent others from using your patented technology without permission. Because your patented technology is disclosed to the public, it is possible to design around in some cases, and in fact, there are frequent cases of unauthorized infringement in foreign countries. To prevent such incidents, post-registration enforcements may be more important than the actual filing and registering. Moreover, if it is a breakthrough technology that no one expected before, it may be appropriate to manage as a trade secret not to be made public forever from the beginning (c.f. In fact, patents are only valid for 15 to 18 years after registration). In this regard, it is recommended that you consult a lawyer or a patent attorney during the early stages of your business about the strategy for building your IP portfolio.
Cybersecurity is especially important these days. Particularly, for technology-based startups where all the company's assets exist as intangible IP, the importance of cybersecurity cannot be overemphasized. Here is a list of security actions that startups can easily take. - Using encrypted secure cloud archives, e-mail, and file transfer applications (The services provided by many IT companies for free do not guarantee a high level of security, so you should check!). - Encrypting work PCs and mobile devices of all employees (Sending and receiving internal classified documents or work products through personal e-mail must be avoided.)
- Prohibiting employees from using personal flash drives other than secure USB (Law firms are also somewhat insensitive to this issue! There was a case where an associate lawyer lost his laptop with clients' litigation documents saved on a personal USB while working in a public place.) - Implementing a policy to preserve and destroy documents (Establishing a security level for top-secret / secret / general, restricting employees who have access to the documents, and setting up a deadline for document destruction, e.g., top-secret 1 year, secret 3 years, and general 5 years). I also have experience working for a large company, and cybersecurity usually slows down the process and is a very cumbersome process. However, it is desirable to approach these security actions based on the concept of the last bastion to prepare for a company's emergency, rather than peacetime, and it is important to create an atmosphere in which all employees can sympathize. If you operate your company without strict security policies when the company is still small and suddenly try to implement strict security policies one day as the company grows, you will face members' resistance. Therefore, it is desirable to implement security policies from the beginning.
Resignation of members and follow-up management The biggest obstacle to protecting IP may be the departure of one of the founders or employees who developed the core technology. If a key member of your company leaves due to internal conflicts among founders or unsatisfactory compensation levels, they may move to a competitor or start their own businesses and threaten your business using those technologies. This is also why reasonable equity allocation is important for especially founding members.
Nevertheless, you cannot prevent founding members or employees from leaving the company. Therefore, it is necessary to enter into an agreement stipulating a non-competition obligation within a reasonable period and region after the termination of employment. Of course, it's different from state to state, so you have to check each state law (e.g., According to the California Business and Professions Code Section 16600, "Every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void”). It is also desirable to consider this when you enter into the employment agreement before starting any work (before there are any conflicts between the employee and the company) because it is highly likely that the non-competitive agreement will be voided if it is signed after the resignation and more conflicts will arise with the employee.