Guest post: Five common mistakes of early-stage tech companies
Small (and even large) companies often make mistakes in manging their IP rights, Martin Hyden of Finnegan’s London office discusses five of the most common
Early stage technology companies, such as university spin-outs or technology start-ups face a number of challenges in all areas of business, proper protection and management of their intellectual property being just one of these. It is not surprising that such companies make mistakes; even large, well-established companies often make similar mistakes. Nevertheless, the fact remains that these problems are well known and, with proper management, can be minimised or avoided altogether, resulting in a better contribution of IP to the development and success of the company. The five mistakes discussed here are not the only mistakes. They may not even be the top five most common mistakes. However, experience has shown that at least one, and often all, of these will be encountered, particularly if the company in question has patents as part of its IP protection. The mistakes are not presented in any particular order, the impact of each will depend on the particular circumstances encountered.
1. No IP budget
Protecting IP costs money. In many cases IP spend, particularly patent spend, can be one of the largest line items in a budget after salaries and facility costs. Consequently, it can be difficult, or even impossible, to properly manage IP spend if it has not been called out in an identifiable way in the operating account of a company. Hiding IP spend in a general legal budget or in an R&D budget can lead to decisions being taken in regard to IP that are influenced by completely unrelated matters in order for proper budget control.
The IP portfolios of early-stage companies are rarely in a steady state. In most cases they are growing. Because of the way in which costs increase in the early stages of protection, particularly in patent filing, a relatively low-cost decision one year can become a significant spending burden in the immediately following years, and the cumulative effect of several years of increased activity can quickly cause spending to increase out of control.
IP spend can and should be budgeted. Most large companies with in-house departments manage this activity effectively, but the tools required for this activity are not the preserve of large companies or in-house departments. Even where significant increased spend is envisaged and funded, proper management of the increase can be important to allow spending to be controlled in the future without the need for irreversible cuts that unduly detriment the IP position.
Merely having an IP budget is the first step to addressing this issue. Having an appropriate IP budget is the goal, but merely recognising it as something that needs proper management is the key.
2. Protection of IP not aligned with business strategy
IP rights are business tools; their value to a company is to support its business strategy. When developing a business strategy, it is also possible to identify where ownership or control of IP rights could add value. This alignment is often missing where the criteria used to decide on protection are driven by what is protectable, or what is technically interesting. The fact that something is patentable does not automatically mean that a patent will significantly affect the value of that technology to the business. Similarly, an undue focus on one type of IP protection, such as patents, might mask the fact that protection of trade marks or the use of effective contracts to preserve trade secrets might be a better way to advance the values of the business.
One common effect of failure to align with business strategy is that protection activities are often geared towards the present rather than the future. In a growing business, activities that contribute to the future value can be more significant than those merely adding to its current value.
The business strategy of a company can be particularly useful when managing IP spend. It can identify those areas that are key to the growth of the business, as opposed to those that are alternative options, particularly when those alternatives are unlikely to be adopted by the business. Alignment with business strategy should allow activities to be properly prioritised so that emphasis can be given to essential IP, as opposed to that which is merely nice to have.
3. Inappropriate IP spending
Even when a business has an appropriate IP budget and has aligned its IP strategy with its business strategy, it is still common that spend on IP activities is not in the most productive areas. Spending on patents, especially on wide international filing, at the expense of filing new patent applications, or spending on preparation and filing of patents at the expense of proper legal advice on handling trade secrets or IP in contracts are common issues. Also, spending on patents, where effective protection can be achieved by way of utility models, or not spending to protect trade marks are often encountered.
Spending too little can be as much of an issue as spending too much. If patents are going to be key to the development of the business, looking for the lowest-cost option may not provide the level of engagement necessary for a good result.
Renewal costs for patents are one particular area that can provide problems for early-stage companies, especially where a patent portfolio has been acquired or inherited. Continuing to renew patents where their contribution to the value of the business cannot be seen to be increasing at the same level is an area of concern.
Trade secrets can be one of the most valuable assets. While they appear to be free, failing to spend on proper advice and infrastructure to support trade secret protection can be one way in which a company fails to get the best from its IP.
4. Wrong advisers
It is rare that early-stage companies have the expertise in-house to manage all of their IP activities. Consequently, they become heavily reliant on their advisers to achieve this. Businesses that fail to select advisers who are properly aligned with their objectives rarely get the best advice. When a business is based on spun-out or acquired technology, advisers are often inherited with that technology. Alternatively, they are selected on factors such as geographical location, or sometimes merely on cost. While these may be important, they are not indicators that these advisers are the best ones for your business. In many cases, businesses fail to look at a number of possible advisers before making a choice, or consider the use of multiple advisers for different areas of law or technology. Even asking for examples of work with clients of a similar size or stage of development is often missing.
When selecting advisers, it is important to present the business interests as clearly as possible so that potential advisers can understand what is required. It is also important that an adviser be able to clearly explain what they do, how much it will cost, and how it contributes to the goals of the business.
It is rare that an early-stage business can deal with its IP effectively without the use of advisers. The appeal of going it alone so as to reduce cost may appear appealing at first, the problems that can result are rarely simple or cheap to solve. Appointing appropriate advisers may be important when seeking further investment based on the value of IP in a business.
While establishing a long-term relationship with IP advisers can be rewarding, businesses should also not feel obliged to stay with existing advisers if they cannot meet the requirements of that business.
5. No management responsibility
If IP is to become a significant asset of a business, it is important that it is properly managed within the business. Assigning responsibility for IP to someone who is not a principal member of the business management team is rarely successful. If IP management is treated as something extra, to be done in addition to a main responsibility, it rarely gets the attention it deserves. Also, leaving management of IP in the hands of technical staff is also rarely effective.
The problems discussed in 1 to 4 above often arise because of lack of management responsibility in IP matters. At least one person in the management team needs to be able to present the IP objectives of the business and have responsibility for enabling these objectives to be met.
If IP is presented as forming part of the value of a business, it is important that someone on the management team has the relevant data to show this, in exactly the same way as would happen with financial or other data.
There are few absolute rights and wrongs when dealing with IP as part of a business. While the mistakes outlined above are often not fatal to business success, failing to address them may result in realisation of less than the full value of a business. It is possible to for early-stage businesses to manage IP issues effectively and avoiding or correcting these mistakes can go a long way to achieving the goal of business success.