VIMA Handbook 2020

              IP Matters! 5 Tips to Help Startups Protect Their Most Valuable Asset

Click here to download VIMA

Mark Cheng VIMA

Mark Cheng
Counsel
Ella Cheong LLC

   

 

IP is often the most – if not the only – valuable asset of a technology startup. Dealing with IP issues only when they arise is expensive at best, and at worst, potentially jeopardizes the survival of your business.

If you’re an entrepreneur, or building a startup, then you’re most likely faced with a deluge of challenges on a daily basis: developing your product, building your team, raising capital, and more. Set against this backdrop, managing your intellectual property (“IP”) can feel like one expensive distraction among a long list of other distractions.

But ask any successful founder and they’ll tell you that your IP is often the most – if not the only – valuable asset of a technology startup.  Adopting an effective IP strategy from an early stage not only keeps copycats and competitors at bay, but is also a crucial factor in securing capital and fund-raising. Conversely, dealing with IP issues only when they arise is expensive at best, and at worst, potentially jeopardizes the survival of your business. This article therefore presents 5 tips to help startups better manage and protect their most valuable asset, even from an early stage: 

1.    Ensure that your startup owns it IP

Given that your ideas and your IP are often your most valuable asset at the outset of your entrepreneurial journey, it is absolutely imperative that the ownership of these assets belong to your startup. The challenge to such ownership may come from a variety of sources: outsourced vendors, collaborators, even co-founders. To deal with such challenges, consider the following:

  • Ensure that any IP created by vendors or external parties are assigned to your startup. The general position is that IP created by employees in the course of their employment will belong to their employer. But be mindful that there are exceptions in certain jurisdictions whereby employees have to be compensated for such assignments. The same however doesn’t apply to work done by independent contractors, for whom such IP is generally owned by its creator as a starting point. All consultants and independent vendors should therefore sign agreements stating their obligation to assign any IP they develop for your business
  • Ensure that the ownership of IP between co-founders and the startup is properly documented. Startups are often borne out of exciting ideas generated from discussions between friends. The issue of ownership of IP at this stage is often informal, loosely defined and vague. Post-incorporation of the startup however, it is recommended that all co-founders enter into an agreement that any IP created pre-incorporation be transferred to the company. Likewise, any further inventive contributions from any of the co-founders should automatically vest in the company as well. This ensures that departing co-founders do not also take crucial IP away from the company, crippling the startup in the process.
  • Ensure that ownership positions for jointly developed IP are clearly spelt out. Turning a great idea into a great product often requires the input and contributions of external expertise and collaborators. In such situations, it is important that any business partners or joint development efforts should clearly articulate the rights each party has to the jointly developed IP, including the ownership of such joint development efforts. This prevents confusion further down the road, especially in circumstances where both parties may want to take the IP in different directions.

The above measures may seem unnecessarily pedantic in the early days of your startup journey, but may prove to be good foresight in the event of any subsequent disputes, or when you’re trying to file for an IPO over your billion-dollar startup.

2.     Adopt a cost-effective IP protection strategy

For startups concerned about minimizing their burn rate, the old adage that “cash is king” has never rung truer. Navigating the world of IP protection can therefore seem complex, daunting, and – most importantly – expensive. Thankfully, there are some simple and cost-effective techniques that startups can adopt to minimize anxiety while achieving comprehensive protection:

  • Conduct an IP Audit to identify your core assets. The best starting point is to critically evaluate what sets you apart from your competitors, and then to protect the IP assets that drive that competitive advantage. Bear in mind also that one subject matter may have multiple types of IP protection in it. Software for example, can be protected as a copyright work, a trade secret, or even a patent! It is therefore important to conduct a cost-benefit analysis to identify the most appropriate form of protection for each asset.
  • Patents are not the only form of protection. Patents are often seen as the “nuclear warhead” of IP protection – powerful, expensive, and dangerous. However, while patents can be incredibly valuable, they need not be the only weapon you stockpile in your arsenal. Trade marks, copyright, trade secrets and confidential information, registered designs, and data can all be equally valuable, if not more so. Technology startups should avoid losing sight of the forest for the trees, and ignoring the value of non-patent IP protection.
  • If you do need to file a patent, make sure it’s doing work. Filing a multitude of poorly drafted patents is unlikely to create any return on investment for your business. Building a large patent portfolio can also be time consuming, expensive, and impractical for a technology startup. Instead, startups should only file patents that are directed to the core value of their business, with well drafted claims that provide meaningful protection. Too often, we see technology startups seek to file patents for the sake of having a patent, without considering if it truly generates any real value for the business.
  • Use the IP system strategically. The World Intellectual Property Organisation has implemented various procedural systems (e.g. the Madrid Protocol, the Patent Cooperation Treaty, etc.) that allow applicants to save costs when filing for IP protection in multiple jurisdictions. An understanding of these systems will also afford applicants a longer runway to decide which countries they need protection in, which can be useful for startups who don’t yet know where their eventual markets will be. In Singapore, the Intellectual Property Office of Singapore has also implemented innovative measures (e.g. IP Fast Track, ASPEC, etc.) which allow applicants to enjoy prioritized protection, and to save time and money. It is therefore never too early to consult an IP professional to understand how you can tap on these regimes to your advantage.
  • Tap on available government grants. Local companies may apply for several grants that are administered by Enterprise Singapore to defray eligible IP costs. These include the Enterprise Development Grant for companies seeking to upgrade their businesses, innovate or venture overseas; or the Market Readiness Assistance scheme for companies looking to market products and services overseas. Qualifying startups may also rely on several financial assistance and mentorship programmes being offered by Startup SG.

3.     Pay attention to your Brand

Startups and founders are often hyper-focused on product development and for good reason: without a good product, there are no customers. That said, founders should not neglect the role that branding can play in helping gain market traction over time. After all, while the value of technology will only erode over time through obsolescence and competition, the brand value of a successful company will continue to increase over time. The following are some important steps to help maximise the value of your brand:

  • Do your due diligence. When first choosing a name for your company, do conduct internet and trade mark database searches to ensure that no one else is using your name. Also make sure that the domain names and social media handles that you intend to use are available. You may also wish to engage an IP professional to help you conduct a professional trade mark search for a more detailed analysis and opinion. There’s nothing worse than gaining significant market traction with your product, but then being forced to undergo a re-branding exercise when you realise that there’s a more established player in your market using the same or similar name.
  • Choose a name that's distinctive. While it might be tempting to choose a name that easily describes your product or service to your customer, this might inadvertently hurt your ability to seek trade mark protection. The reason for this is that trade marks are only eligible for registered protection if they are distinctive and capable of distinguishing your goods and/or services. Marks that describe qualities (e.g. “Super”, “best” or “cheap”) or intended purposes (e.g. “Cleaner” or “detergent”) are therefore unlikely to succeed in an application for registered protection.
  • Think about the foreign cultural implications of your brand. If you intend to globalize your business, it’s a good idea to find out what the local translation of your name, logo or tag line means. The last thing you want is to have a linguistic or cultural disaster on your hands in a new market.
  • Take the necessary steps to protect and enforce your brand. Having accrued significant goodwill in your name, logo and tag lines, make sure you take the necessary steps to prevent competitors from free riding on your hard work. This includes registering your trade marks in key markets, as well as securing the appropriate internet domain name and social media handles. Importantly, make sure you are also actively monitor the market for counterfeits or other competitors using identical or similar marks, and take swift action to enforce against infringement. Ultimately, a brand is only as valuable as the enforcement actions taken to protect it.

4.     Protect your confidentiality

Confidential information and trade secrets can be amongst the most valuable assets a business owns. This is especially true for startups whose products, business plans and go-to-market strategies have yet to fully crystallize. Assets such as algorithms, source codes, customer lists, research data, and marketing plans, are all therefore critical business assets that can be compromised if not handled properly. To protect its confidential information, a company must take reasonable steps to preserve the confidentiality of its assets. The following are some suggested measures:

  • Label confidential information. Documents or assets that are confidential should be clearly marked as such. Labelling confidential information is not only a clear step towards preserving its confidentiality, but also acts as a practical disincentive for recipients to abuse such confidential information.
  • Train staff to know what is confidential and what is not. A prime area for exposure is often departing employees who choose to work for a competitor. It is therefore a best practice to ensure that employment agreements contain non-disclosure provisions. Employees should also be periodically trained on what constitutes the start-up’s proprietary confidential information, and the company’s existing policies on protecting such assets. Given recent changes to the law on breach of confidence in Singapore1, former employees might find themselves liable for damages by simply taking confidential information, even if they have not used or disclosed the same. To avoid such unnecessary misunderstandings, departing employees should be reminded about their ongoing confidentiality obligations during their exit interviews.
  • Implement proper access controls and sharing procedures. The precise nature of such rules and procedures will vary depending your business and the type of confidential information you deal with. However, a good place to start is to identify your startup’s most valuable trade secrets, and determine which job functions will have access to such information. Consider also what sort of access controls (whether physical or IT-related) should be in place, and when such information may be released to third-parties outside of the organization. Keep your procedures simple, and ensure that employees are aware of how they work.
  • Sign non-disclosure agreements with third parties. As a matter of day-to-day business, startups may be required to disclose its confidential information to third parties such as collaborators, vendors or consultants. Many of these standard form contracts will contain weak confidentiality provisions, if any. In these circumstances, it is best to sign a separate NDA to protect your interests or ensure that the confidentiality provisions are beefed up. The VIMA suite contains a template NDA which may be a good starting point for this purpose.

5.     Understand the importance of IP due diligence

Given that IP assets play an increasingly significant role in corporate transactions, the importance of conducting an IP due diligence cannot be overstated. The IP due diligence process provides investors with valuable information about the strength and validity of an investment target’s intellectual assets. Startups looking to successfully raise capital must therefore understand the due diligence process, and be aware of what investors are looking for:

  • Purpose of an IP due diligence. While investors will often include a litany of representations and warranties to protect their investment, such contractual terms cannot remedy the real problem that arises from a lack of due diligence: that the buyer cannot exploit the IP in the manner which they bargained for. An IP due diligence exercise will therefore assist the investor to:
    • Identify the IP assets in question.
    • Establish ownership and status of the IP.
    • Assess how the IP was developed or acquired.
    • Review any IP-related agreements.
    • Assess the target’s IP protection and enforcement.
    • Identify any IP-related disputes that the target is currently or was previously involved in.
    • Ensure that the buyer has the necessary freedom-to-operate when exploit the target’s IP; and
    • Conduct a valuation of the IP.

In preparing for a due diligence exercise, the list of representations and warranties set out in Schedule 4 of the VIMA Model Subscription Agreement may provide founders with further insight into what investors are looking out for.

  • IP strategy as a proxy for managerial qualities. An increasing number of investors are using IP due diligence not only to assess the target’s IP portfolio, but as a proxy for managerial qualities. In other words, if an investor is convinced that the startup has a sound IP strategy and a strong IP portfolio, then the team behind the startup is likely to have gotten other things right too. Unfortunately, the converse is likely also to be true.
  • Putting your money where your mouth is. Investors hear hundreds of great pitches in a year, but not every startup is able to walk the talk. One common strategy for investors is to look at the alignment between what the founders have pitched about its technology and business model, and what they have actually done with their IP. Founders who have not taken the necessary steps to address the gaps in their IP strategy – or worse, are not aware of the existence of such gaps – will not stand in good stead in the eyes of savvy investors.
  • Get ahead of the due diligence process. If you’re looking to raise capital, you should be thinking about due diligence long before the process actually starts. Consider enlisting the help of an IP professional to conduct a pre-diligence of your IP well before the investor’s diligence team arrives. This allows you ample time to identify gaps that may exist, and to make the necessary corrections. An effective pre-diligence exercise should also help you articulate a cogent set of explanations for the various decisions made regarding the businesses’ IP assets, protection, and risk management.

 


ENDNOTES:

1. See I-Admin (Singapore) Pte Ltd v Hong Ying Ting and others [2020] SGCA 32].

 

AUTHOR

Mark Cheng VIMA

Mark Cheng

Mark leads the IP Strategy practice at Ella Cheong LLC. He brings to his practice pragmatism, dedication, and a strong affinity for problem-solving. Combining his experience as a commercial consultant and a legal professional, Mark is committed to delivering actionable insights that go beyond mere legalese. Mark has spent many years helping government agencies, enterprises and startups on IP strategy and commercialization to navigate the complex IP landscape across a diverse range of industries, including public health, medical devices, building and construction, aviation, defence, education and social media. Outside of practice, Mark also educates public officers, entrepreneurs and enterprises as an Adjunct Faculty at IPOS International, on IP issues across business, technology and the arts. He also has a keen interest in writing and performing music, and is a passionate advocate for the arts, media and technology in Singapore.

Disclaimer: This article is intended for your general information only. It is not intended to be nor should it be regarded as or relied upon as legal advice. You should consult a qualified legal professional before taking any action or omitting to take action in relation to matters discussed herein. This article does not create an attorney-client relationship and is not attorney advertising.

Published 7 December 2020

To read the Premium Articles, please fill up the form below. Thank you! 

ARTICLES


 

   SIGN-UP FOR PREMIUM ARTICLES BELOW!

  • VIMA Term Sheet - A road map for a start-up's relationship with investors
  • The Convertible Agreement Regarding Equity - Why CARE?
  • A guide to Employee Incentive Schemes and Employment Legislation in Singapore
  • Relevance and use of the VIMA in Southeast Asia
  • Tax - An essential consideration for start-ups
  • Considerations in Valuations of start-ups
  • The role of ESG (environmental, social and governance) in start-ups 

A link to the Premium Articles will be sent to the email provided in the form below.