Category: Entrepreneur

Ten Common Concerns with Expanding Business to the United States

Ten Common Concerns with Doing Business in the United States

Startup IP, Investors, and Nondisclosures

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.

Governmental Sources for Inventor Prototyping and Manufacturing Assistance

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.

Startup Myth – First Come First Served for Domain Names

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.

Small Business Innovative Research Funding for Your Patentable Concept

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:

  1. Funding – The recipient can receive from about $100k in early phases to slightly less than $1,000,000 throughout the phases of a project.
  2. Intellectual property – The recipient maintains substantial ownership of the involved intellectual property.

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:

  • Color Sorting of Post-Consumer Glass and Plastic Containers to Improve Their Recyclability
  • Improving Business-Consumer Commerce Via Mobile Social Networking Services
  • Household Hazardous Substances Data System
  • Hearing Aid Connectivity to Consumer Electronics
  • Device For Aiding Memory Dysfunction in Elderly
  • A Pollution Free Aerosol Dispenser

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!

Provisional Patent Applications Must Have Sufficient Technical Description

Frequently I hear the misstatement that one can just submit some notes and pictures of one’s product in a provisional patent application. People think this is so because the application is “informal” and will not be examined by the patent office. Unfortunately, I have seen multiple situations where an entrepreneur had an inadequate disclosure because “Someone said I could just submit my notes and sketches and I’m covered.” WRONG! Even though provisional patent applications are not directly examined by the patent office, the provisional should be thought of as a “patent-lite” and prepared diligently.

The goals of a provisional patent application include securing a filing date, which is a critical date in the process. Sufficient technical disclosure should include enough detail to disclose any sold or publicly used versions of the product, support the claims and description of the future nonprovisional application, and support arguments which distinguish the product from the prior art. Failure to disclose adequate information can place the filing date or the scope of patent protection in jeopardy.

Imagine the following scenario:

  1. Inventor creates a product on 1/1/10.
  2. Inventor publicly demonstrates the product on 6/30/10 to promote the product, thus starting a one year period in which the inventor must have a filing date.
  3. Inventor files an insufficient provisional patent file on 1/1/11.
  4. Inventor files a thorough nonprovisional patent application on 1/1/12.
  5. The patent office reviews the nonprovisional patent application  on 1/1/14 (it is common for a couple of years to pass before examination) and determines that the invention as claimed in the nonprovisional patent application is not supported by the provisional patent application.

One possible result is that the effective filing date is now the filing date of the nonprovisional patent application, which is 1/1/12. That filing date is more than one year after the inventor publicly used the product, thus the inventor is barred from receiving a patent (Even if the bar to patenting did not exist, any relevant technology created between the filing date of the provisional and the nonprovisional can now be prior art). Another possible result is that the issued patent is limited in scope to what was sufficiently disclosed in the provisional, thus it has less less value.

Don’t fall prey to the myth and take great care in the preparation of your provisional patent application.

Warning: Inventor Assistance Companies

It is tough to sit across the desk from someone and tell them that I think someone took advantage of them, especially when that money could have been better used to help them with prototyping or other steps in their business plan. When I have spoken with people who have used inventor assistance outfits, it appeared they spent a lot of money and received little value in return. In one situation, an inventor and his/her associates paid about $20,000 to an inventor assistance outfit. From what I could tell, they were delivered the following:

  1. the filing receipt for a submitted provisional application (they did not have the actual submitted application).
  2. the filing receipt for a later filed nonprovisional application (they did not have the actual submitted application).
  3. a five to ten page marketing presentation for their product with illustrations, advantages of the product, and other information.
  4. about 200 addresses for companies that might be interested in purchasing the product (the addresses were general and not directed to a specific person at the company).

For argument, let’s assume a value of $5000 – $10,000 for the preparation and filing of the patent applications, which may or may not be fair given the product at issue. That leaves a range of $10,000 to $15,000 for the remainder of the deliverables. That value for those deliverables  seems very questionable. Moreover, the inventor assistance company was still marketing further “services”  to the inventor and associates (for additional fees or royalties, of course).

Make no mistake, the invention and entrepreneurial process can be difficult, expense, and time-consuming. Furthermore, it is rare that an individual will possess all of the skills, time, and money necessary for the complete invention and commercialization process. Thus it is tempting to fall prey to an outfit that markets “one stop shopping” support and relief to the time and stress involved in the process.

I am not sure why such low value was delivered, as the above $10,000 – $15,000 is enough to deliver higher value deliverables and still have a good profit margin. Nonetheless, the situation is fairly typical of what I have seen from inventor assistance companies. For this reason, I suggest talking to other inventors, business counselors, intellectual property attorneys, business attorneys, or others to seek professionals to help you in your invention and entrepreneurial process.

Common Factors in the Decision to File a Patent Application

When working with an inventor or  startup, a frequent question is whether it is prudent to proceed with a patent application. More often than not, I am not in a position to concisely answer the question, as the question may hinge more on economics than intellectual property. A patent search may shed some light on the prudence of moving forward from an intellectual property standpoint, but it doesn’t help answer whether the cost and effort involved in a patent application are worth it. For people at some large business entities or educational institutions, the value may be easier to determine. Moving forward with the process may increase that person’s salary or credibility. For an individual inventor, startup, or small business, the choice is not that simple.

For the startup or individual inventor, a patent should be thought of as an asset. The goal for a patent application should not be a certificate to hang from the wall. In other words, what will moving forward do for your business. You purchased a computer to easily enter, store, search, and communicate data (reducing labor and storage expense). You purchased hosting services for your website to inform others of your product or service (increase revenue) and to enhance your other marketing efforts (reduce expense). You worked with a product designer to optimize the experience of your product for your customers (increase revenue). Even though you probably did not formally analyze purchases for the above, you at least made a “gut level” feel as to how the purchases were beneficial.

There are several formal methods of patent valuation, such as the cost approach, the market approach, and the income approach (the dominant approach for intellectual property). Typically, those approaches may require the expense and effort equal to the cost of moving forward in the patent process. Thus they may not be suitable at this stage of the process. Some questions that might give a “gut level” feel as to whether to move forward to not include:

  • How does your idea help increase revenue or decrease expense?
  • Will a patent application help investors better understand and evaluate the concept?
  • Is the idea in a new field of technology?
  • Is your idea operable only as an improvement to another product or can it be sold independently as a complete product?
  • How large is the total market for your idea (or a related market)?
  • What percentage of the market can your idea help you gain?
  • How many related products exist as your competition?
  • How fast is the industry changing?
  • What are the alternatives to your idea?
  • How much does it cost to manufacture your product?
  • Is the idea in a growing, stable, or declining industry?

Those questions may not lead to a definitive answers,  but they should provide guidance on the decision as to whether to proceed towards a patent. When you made the decision to purchase (or not purchase) a computer, hosting services, or other products and services, you analyzed how it would help your business. You should do the same in deciding to move forward in the patenting process.

Intellectual Property Agreements – Write Them Down!

I know that you have heard it a million times, but I have to say it once more: Write it down! Entity agreements (of which a portion may include intellectual property issues) for the startup should be written down.  By now, you’ve read about the Crunchpad lawsuit, where its looks like the Crunchpad is no more and one of the founders is seeking to create a similar product (the JooJoo) in a new startup. The lawsuit did not mention a signed agreement and it is unclear what each party’s rights are in the involved intellectual property. Some background information can be found in the below links:

http://www.techcrunch.com/2009/11/30/crunchpad-end/

http://mixergy.com/joojoo-crunchpad-chandrasekar-rathakrishnan/

Unfortunately, startups come and go all the time. Fortunately, new potentially successful startups can rise from the pieces of a failed startup. Some of the desirable leftover assets include the  people and the intellectual property.  However, there will be questions on both. What happens with the people and the IP on failure? Are the departing people immediately free to work in the same space as the failed startup? Who has what  rights in the IP?

These issues should be addressed at formation of the startup, not when a failure or dispute occurs. Having the deal documented makes it easier to start making products and minimizes litigation potential and scope in the case of a failed business. Some issues relevant to this dispute often addressed in an intellectual property agreement include:

  • What intellectual property is being contributed to the startup? This should be a detailed description, not just a general intellectual property transfer. It appears that the Crunchpad included hardware, operating system, and application components. Did all of those exist and were they transferred to the startup?
  • What happens to rights on IP derived from the contributed IP? There were some reports that a Crunchpad prototype was the contribution to the startup? Assuming those reports are accurate, who has rights in the IP derived from the prototype. It is possible that the hardware, operating, system, and/or application components were further developed during the operation of the startup. Who has rights in those improvements?
  • What happens to the IP upon the failure of the new formed business or departure of its contributor? Does the IP remain with the startup? Do all rights revert to the contributor? Does the startup retain any rights?

Answering those and other questions at formation can minimize later problems with the intellectual property of a failed business. Failure to address the questions could lead to questions of ownership, unwilling investors,  and product (read: income) delays.