Start-ups are naive about their intellectual property (IP) requirements and tend to overlook possible IP infringements they may be making. What results? A fatal mix of litigation costs, product recalls, negative publicity and sometimes, a taste of prison! Listed here are the top five common (but completely avoidable) IP mistakes made by start-ups.
1. Missed Opportunities
Start-ups tend to miss patent protection opportunities. Due to lack of knowledge of patent law, patent filings, applications, etc., they tend to miss deadlines or fail to implement patent protection strategies for their products, innovations or services. For instance, had XeroxPARC made the decision of patenting its computer mouse invention, it would have received payments from companies such as Apple and Logitech (who have commercialised its inventions without paying it a penny)! If a start-up wishes to patent a product or invention, it must desist from disclosing it publicly through trade-shows, social or news media, or technical paper publications. Start-ups should make sure they know the deadlines for patent applications and rules governing patents so as to ensure their efforts are not wasted.
2. Failure to Own
Another major error made by start-ups is that they do not secure the ownership of their intellectual property rights. They do not obtain licenses for the IPs developed by their founders before the start-up was registered or incorporated. Such a mistake could prove to be very expensive for the start-up to resolve. If the start-up does not have licenses for its IP, be it its brand name, trademark, or product, it runs the risk of being held hostage by a founder or employee until it revises its product to remove the contributions of the founder or the employee or transfers the IP rights to him. Start-ups should ensure that they obtain IP rights for developed products either before the startup is incorporated or before the founders become its employees.
Failure to obtain proper agreements from employees and contractors could also take an ugly turn. An example is that of a major golf company whose graphic artist (who had earlier created its logo) sent it a demand letter stating that he had not assigned the logo’s copyright to the company. He demanded payment and was later on paid more than 1 million USD by the company to obtain the logo copyrights. As the company had already invested millions of dollars in marketing since the logo was first used, it could not afford to forfeit the logo and thus chose to settle the matter privately by paying off the graphic designer.
3. Poor Trademark Selection
Start-ups fail to carefully select their trademarks and end up choosing trademarks whose protection could be difficult. For instance, the ‘Windows’ trademark by Microsoft for its operating system runs the risk of being non-protectable because the word ‘windows’ is generic and descriptive. Intel learned a hard lesson when it adopted the ‘386’ trademark for its microprocessors. For Intel, this term could not be formally adopted as a trademark because the term began to be used as a general name for specific microprocessors. Intel lost its trademark battle against AMD microprocessor that started using the same term because the court decided the trademark was not protectable anymore. Similar was the case with the term ‘escalator’.
Sometimes founders of start-ups may use intellectual property such as trade secrets, computer software or even customer lists from their previous employers. Such misconduct can actually cripple the start-up. If it loses a lawsuit, it will go bankrupt reconciling fines, paying for damages, or recommencing product development from scratch. In the worst case scenario, its founders could go behind bars! If it wins the lawsuit, it will experience delays in product development or launches, distraction of management and loss of finances ensuing from legal litigations.
5. Too Much of Open Source!
Uncontrolled use of open-source software for developing products could spell doom. A start-up could experience problems during an asset sale or a merger-based exit. Acquiring companies and venture investors shy away from products that are based on open source software. In case of acquisition agreements, most investors demand representations that the start-up products do not include open source software. If the product is based on open source software, the acquiring company may either terminate the acquisition or reduce its price. Alternately, it may ask the start-up to remove the open source software from the product.
Intellectual property has the power to either advance or cripple the growth of a start-up and so, should never be overlooked. Most IP mistakes can be avoided through proper due diligence before making investments or taking critical strategic decisions.