Scaling Up: Your IP

IP is central to your starup business and to your valuation, and it is one of the main things investors will look at during due diligence.  Here we look at how you can make sure you have all your IP securely within your company, and therefore avoid any doubts or questions being raised that could affect your valuation.

1. Do you own the IP created by your contractors or freelancers?
2. Have you made sure you own all the IP any suppliers have created for you?
3. And what about the Founders’ IP?
4. Don’t lose your IP to your customers, and how to prevent them copying or rebuilding your service or platform themselves.
5. Protecting your confidential info during pitching and proposals – are NDAs enough?
6. Do you need to register your Trade Marks now, or is it safe to wait and spread the cost? But I have the Domain Name – is that enough?
7. And what about Patents…? 

1. Do you own the IP created by your contractors or freelancers?

Do not make the mistake of thinking that just because you engage and pay someone to create, develop or write something for you (code, logos or written text for example), that you own what they deliver. Unless they are an employee, you don’t automatically own anything, and they in fact retain all IP as the original creator of the work.

To make sure that you legally own it all, you need an “assignment” of IP, which is a formal legal transfer of ownership, and under English law this must be in writing and signed.  So, make sure you have a proper contract with all contractors and freelancers that covers this. 

Contracts are of course important for other reasons such as specifying what needs to be delivered, when, and what the fees are.  And, a proper contract will include warranties (or promises) from the contractor or freelancer that the work is original and does not infringe or rip off anyone else’s IP rights.  This is all crucial to ensuring that you have the IP, and you know it is valid and will not cause problems in the future.

Do of course make sure these contracts are with your Company, not with individuals or the founders – it is your company that the investors will invest in, and all IP must be owned by the company.  If IP (code, logos, written words etc) was created before the company was formed, make sure you tidy all this up with simple assignments (IP transfers) into the company, otherwise it stays with individuals and will cause problems later.

2. Have you made sure you own all the IP any suppliers have created for you?

All of this equally applies when you engage another company to work for you or to supply you with services.  You must make sure that you have a written contract with that company / supplier that assigns all IP they create for you, otherwise they can retain those IP rights and this creates a hole in your investment pack.

Again, you should have strong warranties (promises) from them that what they create and deliver to you is non-infringing and will not cause you to suffer any claims from any third parties in relation to the deliverable.  And they should indemnify you against any failure on this front i.e. they will cover you financially if there is a third-party claim or you suffer a loss because of what they supply to you. 

3. And what about the Founders’ IP?

Once the company is formed, and you have directors or other services agreements in place, then the IP generated by the founders will indeed sit with the company.  But prior to that, on the same principles as above, all IP will sit with the individual who created it.

It is crucial that a proper audit of IP is done, and a proper sweep assignment is signed to move even the founders’ IP generated before company incorporation, into the company.

4. Don’t lose your IP to your customers, and how to prevent them copying or rebuilding your service or platform themselves.

In your contracts with customers, make sure the licence, access right or other service description is properly formed to only give the customer the right to use your product or service as intended under the contract, and does not accidently give them any broader rights to the IP that may allow them to further develop or sublicence the product or service.

There is standard wording about reverse engineering and decompiling software that should be used.  And you can also add wording that restricts them from using your know-how, or their experience of your product or service, for building something similar or otherwise competing with you unfairly.

5. Protecting your confidential info during pitching and proposals – are NDAs enough? 

IP protection under the law only attaches to and protects tangible IP such as software code, images, logos, music and the written word.  There is no underlying IP protection for ideas.

So, when presenting to customers or other third parties, you should have in place written NDAs (Non-Disclosure Agreements / Confidentiality Agreements) with the other party.  This is a contractual layer that specifies that the information or ideas disclosed are confidential and can only be used by the other party for a specific and limited purpose (normally the purposes of discussing a possible relationship, or indeed fulfilling that relationship).  It therefore restricts any use outside of that particular purpose.

However, these are contracts, and to be effective need to be enforced and will be subject to issues of evidence and proof.  So, you should add as much practical protection into the process as well.

These practical things can include:  only share the minimum amount of information, and do not share the secret sauce; create an evidence trail of what was disclosed when; add copyright notices and dates of disclosure to all documents; remind the recipient verbally that things are confidential; possibly only share physical copies of documents and take them away after the meeting.

6. Do you need to register your Trade Marks now, or is it safe to wait and spread the cost? But I have the Domain Name – is that enough?

Trade Marks are an important IP right that protects your brand and helps prevent others from using a name or brand that may be similar to yours.  You do not need to register a Trade Mark to use a brand, but it does add a great amount of extra protection to ring fence your rights. Getting the timing right for when and where to apply for registrations is not easy, and whilst you don’t need to rush, you should plan it in at least soon after a proper launch in a territory.

However, in any event you should make sure before you settle on a brand and start gaining brand awareness and goodwill in your brand, that it is actually available to use and you will not risk infringing someone else’s pre-existing rights.  You should at least do thorough Google searches, and even your own searches of local Trade Mark registries.  Formal searches by lawyers should be considered before a full launch.

And remember Domain Names do not give you any trade mark rights, and the fact that you manage to get a Domain Name registered does not mean that you will not risk infringing another company’s Trade Mark rights – they are separate systems and Domain Names are not formal IP rights.

And also, just like the IP points above, do make sure that all registrations are in the name of the company.  It is far too common to see Domain Names registered in the name of an employee or contractor, or in the name of a hosting agency.  These need to be transferred into the name of the accompany as soon as possible.

7. And what about Patents…?

Patents are a very strong layer of IP protection, but are actually quite rare in software and online businesses.  To get a patent there really needs to be a significant inventive step to create something that has simply not be done before from a technological point of view.  Most software and platform business may have novel ideas and business solutions in them, but normally do not have an actual inventive step involved.  That us not to say it is impossible, and software patents can be granted, but they are difficult and expensive, so do have realistic expectations about whether it is possible or a good strategy.