Archive | IP

Shhhh…. Why startups should care about trade secrets?

Posted on 08 March 2009

Don't forget to protect your company's intellectual assets by keeping a secret.

Trade secrets are an underappreciated tool in protection of intellectual assets of high technology startups. And it is surprisingly easy – just keep it a secret. Of course, there is a bit more to it, but that’s the concept in a nutshell. For a new company without the financial resources to build a substantial patent portfolio, trade secrets may be an important tool for your company as it grows.

Why should every entrepreneur care about trade secrets? Because using trade secrets may allow you to hold off on filing a patent or limit your need to file so many patents. Of course it won’t work in every situation, but I’ve seen too many new startups sent $20,000 to $30,000 out the door on a patent filing, when they may have been able to save those funds until a later point. For most startups, it won’t be your only strategy, but should be part of your overall strategy (and it sounds good in a pitch when you inform investors that certain assets are protected as trade secrets).

The commonly understood definition of a trade secret is any information, including a formula, technique, pattern, physical device, program, idea, process, compilation of information or other information that 1) provides a business with a competitive advantage (that is generally unknown and not readily discoverable), and 2) where the individual or company takes reasonable steps to protect the secret and maintain these protections, absent improper acquisition or theft. A trade secret right permits the owner of the right to act against persons who breach an agreement or a confidential relationship, or who otherwise use improper means to misappropriate secret information. This allows you to retain the right to the secrets that give you a competitive advantage.

In most cases, the owner of the trade secret has expended some costs to develop or exploit this trade secret. The scope of what qualifies for a trade secret is quite broad, even including negative information (where your efforts show that something is not possible and shouldn’t be researched or exploited further). The key for most startup companies is the information provides you a distinct competitive advantage – and therefore you take steps to protect this information.

Examples of Trade Secrets

Customer Lists
Software Code
Supplier Lists
Blueprints
Maps
Design Drawings
Business Plans
Company Records (ex. Personnel, Financial, Sales)
Chemical compounds
Business processes
Survey results
Prototypes
Research results
Sales and marketing plans

Trade secret rights are, for the most part, governed by state law. California courts have generally considered the following factors in deciding whether information constitutes protectible trade secrets of a company: (1) whether the information has economic value due to its relative anonymity in the industry; (2) the company’s efforts to keep the information secret, both outside the company and within the company; (3) the time and money spent by the company in developing the information; (4) the relative commercial value of the information; and (5) the ease or difficulty with which the information could be independently obtained by outsiders. The nature of the “reasonable efforts” necessary to protect a trade secret varies depending on the nature of the trade secret. They include non-disclosure agreements with employees (and other companies to whom the trade secrets are disclosed), marking any lab books and other materials as confidential, and restricting access to trade secrets on a “need‑to‑know” basis. Trade secrets can range from computer programs to customer lists to the formula for Coca Cola.

Trade secret law protects owners from the wrongful appropriation of their trade secrets, but, unlike the patent law, not from independent development of the same information by other parties. Trade secrets are protected in most foreign countries, but the statutory protection is generally much weaker than in the United States. This weakness of the statutory scheme makes the use of contracts much more important in foreign countries.

Why Utilize Trade Secrets Laws and Rights?

· You are considering applying for a patent or have already applied for a patent, but have not yet received the patent

· You have a trade secret that can be kept confidential over an extended period of time without unusual effort (which can remain a trade secret longer than the information can be protected by a patent)

· You have information that can’t be patented

· You have a unique process, procedure, operating manner, etc. that differentiates the way you produce a product

· You have valuable information, but it is not the “crown jewel” of the company

In addition to protecting its own trade secrets, a company should be careful not to misappropriate the secrets of others. This is particularly important when a company hires a competitor’s employee.

Not Keeping Secrets

What could happen… Your management team has agreed that while you are considering obtaining other formal I.P. protections, you’ll keep your production process a secret. Is that enough?

What to expect… No. High tech companies’ most valuable assets may be their technical knowledge. To protect this knowledge and know-how, companies can rely on protections offered by trade secrets. In order to receive protection for your trade secrets (1) your confidential information must have restricted availability, (2) the information receives economic value because of the limitations on its availability, and (3) you must make “reasonable precautions” to keep the information secret and confidential.

It isn’t enough to decide to keep your technical process a secret – you also need to take “reasonable precautions” to keep the information a secret. While there isn’t any absolute understanding of what would be seen as “reasonable precautions,” high tech start-up companies should create and operate under a formal trade secret protection policy. Companies should follow proper protocol set forth in their policies and should provide these policies to each employee, independent contractor or consultant.

TIP: Just because information is “confidential” doesn’t mean it is a legally protected trade secret.

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www.Uh-Oh.com: Just because the domain is available doesn’t mean it is “free”

Posted on 17 February 2009

Think smartly about your domain name (not only if it is available on godaddy.com)

Nearly every company now has a website – it is a standard practice to reach potential customers, employees, and partners through the web. Today’s technology companies utilize features like blogs, comment boards, and e-commerce to create interactive forums with their customers. Many technology companies rely on the web as their first (and sometimes only) sales tool.

Your first step in developing a web presence is selecting your domain name – and this choice does raise certain intellectual property issues. For some companies, their domain names represent one of their most valued assets. Domain names are unique designations used to identify a particular computer on the Internet. In order to communicate with each other on networks, computers must have individual identifications. A domain name is a way to identify and access a computer to a unique site on the Internet. Domain names typically consist of letters, numbers and hyphens. An example is www.google.com or www.yahoo.com.

Domain names can be registered with any one of the over 150 registrars accredited by the Internet Corporation for Assigned Names and Numbers (“ICANN,”) a non-profit corporation that manages the Internet domain name system. Anyone can register a domain name in the .com, .info, .net or .org scheme. Registering a domain name does not, however, give one trademark protection over the domain. Domain name registrars are not liable for trademark infringement, dilution, or contributory infringement merely because they issue a domain name that is claimed to infringe.

Because a domain name on the Internet is a unique address designating an Internet site, it may be a trademark or service mark, and have legal protection. However, the Patent and Trademark Office has stated that if a domain name is used solely as an Internet address, and not to identify a source of goods and services, it is not protectable as a trademark. A business may be wise to include its domain name in advertising its goods or services in order to obtain trademark protection.

Your Domain Name & Trademark Law

What could happen… You’ve found an available domain name for your website and are prepared to launch the site to begin drawing customers to the site. Since the domain name wasn’t taken, that means we are free to operate it, right?

What to expect… Maybe not. Don’t assume that just because the domain name is available that you are free to use the domain name. Domain names and the use of meta-data on your website have been the source of serious headaches for today’s technology companies. Companies have been found to be liable for infringement if they use a domain name that is close to or similar to an existing trademark. If your site sells services or products that would confuse or mislead a consumer with another trademarked product, your company may be held to be liable. Domain names are also protected under the Anticybersquatting Consumer Protection Act and could lead to criminal penalties for your business. In certain circumstances, the registrar company may even be able to have your domain name transferred over to the owner of the similar mark (even if your mark is stronger in the marketplace).

Before using a domain name for your website, be sure to conduct a trademark search (or work with an attorney to have this done). And remember to review both state and federal databases.

TIP: Before you use any available domain name, be sure to check for potential trademark infringements.

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Posted in For Entrepreneurs, IPComments (0)

What to watch for as you turn a “school project” business plan into a real business

Posted on 23 September 2008

Some of today’s most impressive tech companies have sprung from a university or college student. Google and Yahoo! — each developed by PhD students at Stanford. Oh, don’t forget about HP, Sun, and Cisco too, each proud Stanford University projects. DEC was started at MIT’s Lincoln Labs. And Akamai, another proud MIT product. There are countless others out there…

The National Council of Entrepreneurial Tech Transfer posts the following evidence that startups that are created using IP or smarts from universities and colleges are more successful than others:

20 year returns for Early/Seed VCs was 20.6%, compared to 13.8% for Later Stage VCs and 8.2% for the S&P 500

8 percent of all university startups go public, in comparison to a “going public rate” of only 0.07 percent for other U.S. enterprises - a 114x difference

over 400 university startups are created nationally each year based on federally funded R&D, which included Google, Netscape, Genentech, Lycos, Sun Microsystems, Silicon Graphics, and Cisco Systems

68% of university startups created between 1980 to 2000 remained in business in 2001, while regular startups experienced a 90% failure rate during that same time period

And, to top that off, more colleges and universities are offering entrepreneurial courses or business plan competitions where the goal is to create a winning business plan (that can be turned into a business).

So it isn’t all that surprising that many of these undergraduates, MBAs or PhDs ultimately decide to give this whole “startup-life” a try.

What should you consider before turning a school project business plan into a real business?

Fortunately, I’ve had the opportunity to work with several actual or aspiring entrepreneurs through the University of Washington Business Plan Competition put on my the excellent Center for Innovation and Entrepreneurship. As a result of this experience and others, I’ve worked with several groups that involve a number of students or former students who have a business plan or project, and decide to turn it into a business.

The biggest issue for these teams that want to become a business: Keeping Momentum.

The biggest challenge for these teams: Weeding out the “hangers-on”.

So, here are a couple thoughts and pieces of advise for a student looking to turn his or her business plan or class project into a business:

(1) Get a friend who is a lawyer. At this stage of things, you will need some legal help and guidance. But you don’t really need a lawyer on retainer yet. So find someone to help you out pre-business. Agree to buy them coffee or take them out for a beer and get their insights. While you are sorting this all out, find someone who you can talk to over coffee about the pre-business stage.

Thankfully, in a city like Seattle or Boston or Silicon Valley, we’ve got plenty of lawyers with start-up expertise. So find someone and get them to be your trusted advisor. Even just with some real basic questions at this early stage, having an advisor with some legal experience can be crucial. Then, when it comes time to hire a lawyer, you’ll already have someone to turn to.

(2) Take some legal formalities. The thought of incorporating the business, signing employment agreements, etc. will make people see this is serious. If you are serious and want to get your business going, then incorporate or get the LLC paperwork done or get stock issued to the founders (but be sure to read #4 before you issue any stock). It’ll cost you a few bucks of legal time (or perhaps not, if you just incorporate and that’s it), but it gets people to realize that the business is official and no longer just a class project.

(3) Ask for a financial commitment. The average start-up takes about $75K of founder money to get it started. That means not just sweat equity, but real cash. If you want to have three or four people start a business, let them know that to do so (or even to find out if this is a realistic option) everyone needs to commit to raising or contributing $10,000. Nothing says commitment like being on the hook for cash.

(4) Put vesting on all founders stock — including a 1 year cliff. I have seen this over and over — a start-up team forms and are like a bunch of newlyweds. It is tough for the business plan or class teams as they already feel like they’ve gone to war together — a few weeks of late nights for that ‘A’ or to make it to the finals of the business plan competition. However, as most tried-and-true entrepreneurs will tell you — writing the business plan is just the first in a long and drawn out series of battles. Don’t peak too soon.

The problem for this new founders team is that they enter this “partnership” with one another with rose colored glasses, not realizing that the odds of the team sticking together is pretty low. So the team issues their stock and decides not to put any restrictions on it (vesting — where if you leave before a period of time, the company gets the stock back). I can’t stress this enough: Don’t do it!

The odds just aren’t in your favor. So agree on vesting for the good of the business. Get everyone to agree to a 3-4 year vesting term where nothing vests for a one year period. If someone commits for a year, they get 25% of their stock and the rest on a monthly basis. If they leave after a month or two, or just don’t work out, they get nothing. Then you effectively solve for the hangers-on issue. If someone contributes for a year, they’ve earned a portion of the company. If not, no harm-no foul.

(5) Ask “Hesitant” Team Members to Be Advisors First. If you aren’t sure of a team member’s commitment levels, have them join the business as an advisor. This is almost like a glorified summer internship, where you can feel them out on a very low-cost basis, and see how ‘into-it’ they are. Give them 0.5% of the stock (which can be given to the Advisor in exchange for any IP they’ve contributed). Then, if they are really committed, you can give them additional equity and get them full-time.

(6) Get all team members to sign a Release/Acknowledgment if they don’t join the business (and perhaps, even if they do). If you decide to go forward with the business, hire a lawyer and make sure they draft a release for those classmates of your team that didn’t join. And, for good measure, ask that the release/acknowledgement language be given to all founders if there were any oral promises or other types of ownership arrangements made. That is the only way to protect yourself fully — and consider #5 about having them come on as advisors.

Conclusion

Remember, inevitably a start-up team will lose founders. And, if a business is started from a business plan you prepare in a class or for a business plan competition, the odds are likely to be even higher. Students have varied levels of commitment and starting a business with a mountain of student loan debt or a wealth of options ahead might not be the best approach.

So remember that you may lose team members and may be best off trimming people early rather than having hangers-on that only minimally contributed to your class project or business plan. It doesn’t mean you are a failure to let these people go or have them leave — it is just part of the deal.

See who rises to the top and let the rest go. But don’t give any equity to anyone unless you have vesting — that way, if someone walks after a couple months, no harm, no foul.