by Sanaz Cordes, MD
When startups are launching, they can be so overwhelmed that they often overlook or delay devising a strategy to protect their intellectual property (IP) - until they are forced to. We encourage our startup clients to plan their IP strategy early, as ownership and enforceability of IP is crucial for their competitive advantage and for future fundraising and exits.
Attorney Tripp Stroud is the founder of Trifecta General Counsel, a law firm working with tech companies on data security, cloud technology, and SaaS contracting. He recently sat down with Value Prop Shop to discuss the basics of IP law as it pertains to tech startups.
As early as the “idea” stage, we advise entrepreneurs to start thinking about protecting their IP. How do you suggest they begin?
An entrepreneur can start by answering this question: “What makes my idea special?”
1. Am I marketing a unique brand?
2. Is my product based on proprietary algorithms or formulas?
3. Do I have unique methodologies that are necessary for my product or services?
VPS: To start, can you provide the most basic definition of the four categories of IP law?
The ways a startup can protect their IP ranges from simply “declaring” ownership to embarking on a 5-year path with the United States Patent and Trademark Office (USPTO).
Here’s a simple way to understand the four categories:
A trademark captures the essence of your brand. It defines your identity in the marketplace. It can be a name, a logo, a brand, or any insignia. A great example is “Coke.” Just the name or logo instantly equate to the soft drink Coca Cola.
Copyright protects original works of authorship - including software code. The creator owns the rights as well as a time-limited right of distributing the creation. Examples include visual or auditory content like books, art, and songs.
3. Trade Secrets
Trade secrets protect your company’s processes and workflows. Trade secrets are not time limited, and retain their protected status for as long as they remain a secret. Examples include the algorithms, formulas, and methodologies necessary for your product to function or for your services to be rendered. Software code can also be a trade secret.
There are two types of patents, and the most basic distinction is that utility patents protect “function,” and design patents protect “appearance.”
VPS: How should startups think about devising a sustainable strategy to protect their IP?
A solid IP strategy needs to factor in the product type, early guardrails, and the company’s long term goals.
Company type: Trademarking is particularly important for consumer facing startups. Their goal is for consumers to instantly identify the product name or insignia, so brand protection is essential.
Getting started: Simply indicating their claim with a trademark mark on any outward-facing materials is how they can get started. Trademarks are defined by use-in-commerce, so the earlier they begin, the better. Startups should also do research to identify if other companies in their specific market or related fields are using the same or similar name/logo/branding. The more novel and differentiated the mark, the better (again, think about what “Coke” means for soft drinks).
Longer term strategy: Startups typically rebrand and pivot during their initial years, so registering for a trademark can be a costly undertaking, if done too early. By demonstrating that they were the first to use it, they can still win trademark rights. Ultimately, a startup registers their trademark with the USPTO and/or international governments.
Company type: Copyright is relevant to all startups. For software companies, copyright protection’s role in IP protection has changed as the industry has shifted to cloud-based code. Cloud-based code is not typically revealed or distributed to users, making it easier to protect code as a trade secret in addition to copyrighted materials. Client deliverables created with technology, such as reports and graphics, can and should be copyright protected.
Getting started: Again, a startup can indicate copyright claims by placing a copyright mark on original works. It is time-limited, but the mark indicates right to ownership and distribution.
Long term strategy: Legal contracts are typically how businesses, including software companies, enforce copyright. Internal agreements, such as Assignment of Property Rights, should be executed with employees and vendors. With customers, licensing or service agreements should include terms to protect your software or deliverables from being copied or modified. There is no required filing with the government for this type of IP protection.
3. Trade Secrets
Company type: Virtually every company has trade secrets. These are methodologies, business practices, and formulas used to create their product or services. For modern, cloud-based software companies, trade secret protection is very important. Software code contains algorithms, formulas, and logic – all of which are proprietary.
Getting started: Even a NewCo with just two cofounders should implement contractual agreements to protect IP. If one of these two people leaves, for example, protections should be in place to ensure that the IP belongs to the company and not the individual. Additionally, nondisclosure agreements protect startups as early as the “idea” stage during conversations with outside parties. Employee and contractor Inventions Agreements ensure that company IP is protected, as well. Finally, customer contract should include terms that prevent reverse engineering of a startup’s product or methodologies.
Long term strategy: Like copyright, there is no filing with the government for trade secrets. But ongoing contract-based protection of IP is crucial for future success - including valuations, investor negotiations, acquisitions, and IPOs.
Company type: To keep it simple, I’ll say that that software is typically not patentable because of difficulty meeting the uniqueness requirement. Patents are awarded for products with a unique function (e.g. drugs) or for products that have a unique “look” or design.
Getting started: The path to patents can be long, complicated, and costly, and it usually requires the expertise of a patent attorney. A Prior Art Search identifies what similar products might already exist. Next, a Freedom to Operate (FTO) analysis rules out any pending or existing patents that a new product could potentially infringe upon.
Long term strategy: To determine which USPTO patent path to take, a startup should assess how crucial speed to market is for their business. This is typically driven by urgency around fundraising or deterring competitors. Filing for a provisional patent, as opposed to the non-provisional patent, allows a startup to begin the “patent–pending” process while securing more time to complete their product development and research. Once either filing process begins, the path can be anywhere from 18 months to 5 years.