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Intellectual Property (IP) is an intangible asset to an entrepreneur. When it comes to assuring investors they are placing their cash in an exclusive product or service that is legally protected, securing your IP is a must.
Alex Fraser of Invenfin, an early-stage venture capital company says there are some things you need to know before you take your idea to investors. According to Fraser, not having proper IP ownership is by far the largest problem Invenfin sees when dealing with the thousands of entrepreneurs that pass through its doors.
Fraser, who lectures on entrepreneurship and venture capital to students, sat down with Memeburn for a no nonsense discussion on what startups need to know.
Entrepreneurs may start off with a great idea, but having the idea does not necessarily mean that you own it.
If you are working on your business idea while still employed, take note:
- In many employment contracts there will be specific clauses which relate to the creation of IP and its ownership. These need to be carefully checked especially if your great new idea is in the same field that your employer operates in. If you are not careful the company may have valid claims to the IP.
- In addition, some employment contracts have restraint of trade or anti-competition clauses which might impact your new venture. These clauses can prevent you from starting a business or working for another company that directly competes with your previous employer’s business.
Once you have established that the IP qualifies as yours exclusively, the next step is to protect it. This depends on the nature of the IP, as Fraser explains.
An online business will have multiple forms of IP protected by a variety of rights. To protect the name, domain and/or logo of the company, a trademark will have to be registered; the software code will be stored in a digital library and be protected by copyright, while the business process performed by the software may be patentable.
To begin researching different types of IP to get an idea of what applies to your idea, Fraser recommends using www.mypatent.co.za.
The value of a concerted effort to protect IP is massive. An investor’s view of the worth of your company rides on it.
“IP is often important for investors as it can provide a startup with some degree of a sustainable competitive advantage in their market, protect and grow their market share and act as a deterrent to potential competitors,” says Fraser.
“Frequently a business or product has more than one form of IP associated with it, which can further increase all of these benefits.”
The identification and protection of IP needs to be managed and can be expensive. But well protected IP is a valuable asset which can increase the probability of a business raising further capital. It will also increase the exit or sale price of your company to an acquirer or future investor.
There are two principles at play here when registering your IP – balancing not spending too much and not spending too little.
- Protecting your IP can be expensive and costs should be deferred for as long as possible but it is important to consider spending some money with an IP lawyer early on says Fraser. A lawyer will help you to identify and protect your IP and determine where you might be infringing on someone else’s IP; and this could save you a lot of money in the long run.
- On the other end of the spectrum, some entrepreneurs spend a fortune rushing to patent a new concept without doing adequate work to prove their concept. Very few investors will even consider an application for funding when the fundamental aspects of your startup have not even been proven or tested.
A risk to keep in mind – employing other people
“As the author of an idea you may not have the necessary skills to fully develop the IP and will need assistance,” adds Fraser.
“Using third parties or employees to develop your IP is fine if you have the right legal protection in place. Any service, development or employment agreements need to be clear on who owns the IP being developed”.
Entrepreneurs also need to ensure that there are nondisclosure or confidentiality agreements signed by service providers and employees if the IP is not yet legally protected.
“Not having the right confidentiality agreements in place can jeopardise the future protection of your IP. For instance a new invention or business process can only be patented if it is novel i.e. not in the public domain. This may seem obvious, but it is also important to tell people what is actually confidential,” Fraser explains.
Before any work starts, both parties need to agree on who owns the IP. If any new IP is created agreements must be in place stating it is yours or that it will be jointly owned.
Often service providers will consider waiving fees for joint ownership rights.
“If you agree to joint ownership, you need to determine up front, how this ownership will be split e.g. 50%-50%, what commercial and usage rights each party will have and who will be responsible for the on-going protection and costs associated with this IP,” concludes Fraser.
Not having this agreed upfront can have major implications on the future use and sale of the IP.