Ten Common Concerns with Expanding Business to the United States
- June 13th, 2011
- Write comment
Archive for the ‘Entrepreneur’ Category
Frequently, in an intellectual property consultation with a startup team, we inventory and discuss the intellectual property involved in the business plan and the timing, cost, and strategy in protecting it. As some intellectual property rights can be impacted or misappropriated upon disclosure, the consultation turns towards upcoming disclosures of the proprietary elements of the business plan. Frequently, the upcoming disclosures includes presentations in front of angels or venture capitalists for funding. In turn, this leads to a discussion of approaches to protect elements of the business plan in light of the upcoming disclosure. Sometimes there is a discussion of nondisclosure agreements, which leads to the fact that the majority of formal investors don’t sign nondisclosure agreements. This can create a problem with the intellectual property rights associated with the business plan. For example, some elements of the business plan may be patentable subject matter. In certain settings, the pitch may be deemed a public disclosure. This would mean that the startup has one year to file a patent application in the United states and has forfeited patent rights in many countries outside the U.S., thus international patent filing protection is limited.
Below are three approaches for considering preservation of intellectual property rights associated with a business plan before pitching to investors:
Common concerns of a startup in disclosing proprietary without a signed NDA include the investor revealing the idea to others, theft of the business plan, and the risk of losing rights in the protectable elements of the business plan. A risk averse approach is to have the suitable intellectual property filings and procedures completed before making any pitches. Intellectual property submissions with a filing date prior to pitching is one of the better approaches to mitigate or minimize the damages associated with those concerns. One scenario where this approach may be useful is a Slanket style business plan. Where the business concept is centered around a product that has limited technological innovation, a catchie brand name, and a strong marketing campaign. The startup team may believe that pitching this without any intellectual property filings may be letting the cat out of the bag and opt for this approach.
A second approach is tiered disclosure of proprietary information. You are typically wasting paper and your breath in presenting a nondisclosure agreement to an investor on a first presentation. The first meeting is typically introductory and there is usually no need to reveal much proprietary information. You should be able to explain the product/service, the problem solved, the target market, financials, and the team credentials without discussing the secret sauce. The investors should then have sufficient information to determine whether they invest in the field of technology, whether they are already invested in a competitor, whether there is potential for return on investment, and whether there is interest in a further conversation. Then during the subsequent conversations, you may provide additional tiers of information. After the first or second presentation you may have a sufficient relationship for a nondisclosure agreement. Almost universally, by the time you are discussing term sheets (and clearly at due diligence) you will have NDAs and have revealed some or all of the proprietary information.
For example, a business plan may be centered around a system for generating and processing medical records using specially formulated inks, printers, and an imager adapted for rapid scanning and 100% accuracy in recognition and processing of the characters. In a first meeting, you might state that you have a system that enables the processing of a 100 bed hospital’s records in thirty minutes. In a later presentation, you might mention the novel ink, printer, and imager. In later presentations or due diligence, you would mention the composition, structure, and process. Be aware that not all investors are open to this approach – Angies’ Angels may be open to this approach while Victor’s Ventures may not. You should know what you are prepared to disclose before each presentation.
A third approach is to risk disclosure. To be sure, you are taking a risk. Investors openly state that they hear many pitches. They also openly state they converse and network with other investors. They also openly state that they provide mentorship to companies. The volume of information from the pitches and that open environment support a reasonable possibility of public or private disclosure of your proprietary information, even inadvertent disclosure. On the other hand, are you dealing with a reputable investor who wants to remain in the business? Are you dealing with someone who has a portfolio built upon others’ business plans? If so, why would they shoot themselves in the foot? Moreover, is the possible funding worth more than the risk of intellectual property disclosure or misappropriation? Could the first mover advantage from the funding outweigh the risk of disclosure?
The approach you choose should fit the intellectual property at issue, the business plan, the investors, and the risk tolerance of the team, among other factors. The above options should help you pitch while considering the preservation of your intellectual property rights.
Many small businesses need help with design and development of inventions at various stages. A startup may want a mockup or virtual prototype in order to pitch for funding. Later, the business may need a working prototype for further proof of concept. Then that prototype may need to be further refined for efficient manufacture. Thus a business may need expertise in moving forward from the concept stage to a tangible product. As I have stated before, be extremely cautious in using inventor assistance companies for these services. That being said, there are some governmental entities that are available for free or at reduced cost.
One great resource for the proof of concept, prototype assistance, and working through some of the early stage engineering issues is the Space Alliance Technology Outreach Program (SATOP). SATOP is an alliance of scientists, engineers, and other technical professionals who provide free technical assistance in machine design, process engineering, material selection, and numerous other technologies. Note: SATOP does not work on software or information technology projects. SATOP offers up to 40 hours of hours of free technical assistance, with a goal a providing a solution within three months. A small business submits a request for technical assistance and the program checks its subject matter expertise and availability before accepting the project. SATOP has centers in Florida, New Mexico, New York, and Texas.
There are other similar programs around the country, although their focus, cost, and scope of assistance may vary. Some programs provide only with the original prototype and others focus on specific industries.. Frequently, the programs are associated with a university or a Small Business Development Center. The University of Pittsburgh Manufacturing Assistance Center can assist with a wide range of issues from conception to the manufacturing process. It can help in creating 2D or 3D CAD models, machining, fabrication, and pilot production. The University of Maine College of Engineering also offers a program available to businesses, entrepreneurs, and researchers. The University of Utah will soon open the Energy Innovation Commercialization Center offering services in the clean and renewable energy.
Other than a search engine, great starting points for locating these program are your local Small Business Development Center counselors or counselors at the entrepreneurship or engineering department of your local university. The programs do not typically retain ownership of the intellectual property, thus you would maintain control of the patents and proprietary technology.
Frequently I encounter businesses seeking to protect a brand name. In discussing the actions taken to date taken, owners frequently state that they have registered the domain name corresponding to the desired brand name. Frequently, they believe that their name is “reserved” or protected because they have already successfully reserved the domain name. It is also often stated that because they were the first registrant of the domain name that they may do as they please with the domain name. Two common incorrect beliefs include that one is entitled to operate a website with the domain name or freely sell the domain name. This is often not the case. Just because one registers a domain first does not mean that the domain name can be lawfully used or sold. Not only does merely registering a domain name frequently confer only limited rights in the domain name or the underlying name, it is also possible that use of the registered domain name may lead to negative consequences.
The most known scenario is where one registers a domain name which is substantially a name in which another party has rights. If I (somehow) was the first registrant and operator of ibm.com, it would not be of much value. Ignoring the .com domain suffix, the relevant part of the domain name just contains the “IBM” trademark. Most people understand and agree that there could be trouble in this scenario, as IBM is a household name. However, most domain name registrants don’t realize that this scenario can occur with lesser known brand names as well. So being the first to register a lesser known domain name may place one in the same questionable situation.
A lesser known scenario is where one registers and uses a name which is similar to the name in which another party has rights. If I sought to register ibmsoftwaresolutions.com, my status as the first registrant of the domain name is again not very helpful in establishing rights in a “IBM software solutions” brand name nor in operating a similarly named website. Again this may not seem surprising using the IBM name as the context. However, as above, this scenario can occur with lesser known brand names as well.
There are times when registering a domain name may be helpful in establishing some level of rights, but being the first to register a domain name does not automatically lead to superior rights in the domain name or in the words contained in the domain name. Use of that domain name or attempted sale of the domain name can lead to loss of goodwill in the name, cease and desist letters, domain name arbitration, trademark actions, or anticybersquatting protection act claims, among possible consequences.
Funding is a concern for many startups and small business creating new products. The Small Business Innovation Research (SBIR) is a congressionally authorized, federal program that may be an option for funding for some of those businesses operating in select fields of technology. Two of the key driving policies of the program are to help the government agencies solve their problems and to bring innovative solutions to the public. Even though there is no man in a question-mark covered suit marketing the SBIR program, it is real and money has been and is currently being awarded. To be sure, the program is only available in select situations and is a difficult process. That being said, eligibility and successfully completing the process brings two key advantages:
The program primarily operates at the agency level. An agency may have a very specific problem that needs to be solved or may be open to solutions to more broad problems. The range of problems is broad as some of the participating agencies include the Department of Agriculture, Department of Health and Human Services, Department of Defense, Department of Education, Department of Energy, Department of Homeland Security, Department of Transportation, and NASA. Those agencies create a diverse technological demand, which makes the SBIR program worth exploring for a lot of innovators. The titles of some prior awarded projects under the program indicate research across the spectrum and include:
The first major step in seeking SBIR funding involves identifying the timing and solicitation topics of the various agencies. The agencies themselves do not post all SBIR solicitations in one location. They are typically posted on the individual agencies’ websites. However, there are some sites to aid your cross-agency search. The Zyn website allows robust searching of SBIR solicitation data.
The next major step involves registering and completing a detailed application in response to a solicitation. The instructions vary by agency and are complicated. The instructions must be followed with diligence or the application may be rejected without substantial review. In fact, about half of applications are rejected because of noncompliance with the rules. The application will take significant time to complete, as it involves detailed project planning, staff information, commercialization strategies, cost information, and other data requirements.
The Small Business Innovation Research program is arduous, but can be worth the reward and should be explored as an option for funding your innovations!