Maybe you’re in due diligence with potential investors. Or you’re looking to partner with another entity on a project. Maybe you’re getting a formal valuation of your company in order to apply for a loan. Questions about intellectual property can come up in a variety of contexts involving different forms of investment into your company.
In our experience there are three types of IP questions savvy investors often ask:
- What IP does your company own, and can you prove you own them?
- What do you think about Competitor X’s IP position?
- Do you have Freedom To Operate?
Let’s consider each of these questions in detail.
What IP do you have, and can you prove you own them?
Ownership of IP is an issue that we have seen sink more companies than any other single factor. Sure, companies can flounder because of poor management decisions, running out of cash, unexpected technical difficulties in product development, etc. However, as a single problem issue that has killed investment deals, partnership agreements, and even patent litigation cases, proof of ownership (or lack thereof) takes the cake.
Don’t let IP ownership become your dead end with investors. If there are any issues, your IP counsel may be able to help you to remedy the issues. You certainly don’t want to wait until you are in the middle of investor due diligence to find out you may have an IP ownership problem.
The main thing to remember is that it’s MUCH easier to deal with each agreement and properly document it at the time of the agreement than to try to remedy situations later. We’ve heard attorney horror stories about clients who had no founders or employment agreements and had to rush to create those foundational documents from scratch at the same time that they were going through deep dive due diligence for a funding event. What’s the saying about “a stitch in time saves nine”? That exactly applies here.
What do you think about Competitor X’s IP position?
Here’s a good IP question: what should you do if you find an existing patent that is similar to the innovation you are developing into a product?
A word of caution right up front: Do NOT shoot off an email to your attorney saying, “OMG, I think my product infringes this patent I just found.” The keyword in this situation is “similar.” Let’s first analyze the IP situation and rationally think about your options.
- The Patent: Who owns the patent? Has the ownership ever been transferred? Does the owner manufacture products related to the patent? What is it about the patent that you think is similar to your product? The drawings?
- The Industry: Is your product industry known to be litigious? Is there a history of companies in the industry suing each other, especially over patent infringement? Has this specific competitor sued other companies over IP issues? Is there an industry standards organization or a patent pool in which the major players in the industry participate?
- The Product: Exactly what about your product is similar to the invention described in the patent? Is it the product as a whole or just a part of the product, or is it the method of using your product? Would it be possible to modify your product to differ from the patent and still be commercially viable?
All of this is to explain that finding a competitor with a potential conflicting patent isn’t an endgame with most investors, but potential investors will want to know how you plan to address the problem before getting involved with your company. In addition to the above, they’ll want to see a large addressable market for your product, a deep understanding of your target customer, and a plan for beating out your potential competitor for that customer.
Do you have ‘Freedom to Operate’?
A potential investor may ask this question to understand the novelty of your technology compared to what is already patented. Knowing the patent landscape of your technology is helpful in determining where in the landscape you are “free to operate,” and where you would likely infringe on an existing patent.
In the product development stage, understanding the IP landscape surrounding your product enables you to “engineer around” an already patented technology, and when drafting the patent it enables you/your patent agent to craft unique claims.
You may come across an attorney who offers to draft a formal Freedom to Operate opinion for you. Know that such a project could cost you tens of thousands of dollars, at a minimum.
A better way to answer this investor question would be to have a solid IP strategy in place, including thorough and up-to-date knowledge of your IP landscape, especially competitor patent portfolios, clearly identify the novelty of your product over others currently on the market, have a plan in place to protect your competitive advantages, such as through patent filings or copyright registrations (especially for software) or a robust trade secret policy. You may also have contingency or forward-looking plans for partnering with competitors in your technology space to take advantage of other companies’ IP portfolios.
For all of these three common investor questions, be sure that you are working with an IP professional with a deep understanding of the unique issues faced by entrepreneurs. A savvy counsel can help you proactively craft your unique answers to these questions strengthening your company’s value.
At Patents Integrated, we’re experts in all aspects of intellectual property and what it can mean for your business. Contact us today to learn more.