Contents 1 Introduction... 1 Part I Startup Funding Sources, Stages of the Life Cycle of a Business, and the Corresponding Intellectual Property Strategies for Each Stage 2 Sources of Company Funding... 11 2.1 Seed Capital and Early-Stage Funding... 11 2.1.1 Personal Investment/Bootstrapping... 12 2.1.2 Friends and Family Funding... 12 2.1.3 Private or Governmental Grant Funding Options.... 13 2.1.4 Crowdfunding... 16 2.2 Equity Funding... 19 2.2.1 Angel Investors... 20 2.2.2 Venture Capital... 20 2.2.3 Rounds of Venture Capital Financing Series A, Series B, Series C, etc.... 21 2.2.4 Business Incubators and Accelerators as a Source of Equity Financing.... 22 2.3 Debt Funding... 23 2.3.1 Loans... 23 2.3.2 Lines of Credit... 26 2.3.3 Securitization with Intellectual Property... 27 2.3.4 Collateralization of IP... 28 2.4 Mezzanine Financing... 31 2.4.1 Subordinate Notes... 32 2.4.2 Preferred Stock... 32 2.5 Anticipated Rate of Return for Investors... 33 3 Early-Stage Strategy... 35 3.1 IP Strategies at the Early Stage.... 35 3.2 Consult with an Intellectual Property Attorney... 36 ix
x Contents 3.3 Begin Building an IP Portfolio and an IP Strategy... 37 3.3.1 Trademarks... 38 3.3.2 Copyrights.... 39 3.3.3 Opting for the Trade Secret Route.... 41 3.3.4 Patents.... 41 3.4 Early-Stage Companies Seeking Investors Need a Business Plan.... 43 3.4.1 Integrating an Intellectual Property Strategy into a Business Plan... 44 3.4.2 IP Due Diligence.... 44 3.4.3 IP Portfolio Development Plan... 45 3.5 Joining a Business Incubator or Accelerator... 45 3.5.1 Case Study: Techstars... 46 3.5.2 Industry-Specific Startup Service Providers and Specialty Incubators... 47 3.6 Summary... 49 4 Growth and Expansion Stage... 51 4.1 Benefits of Leveraging IP During the Growth and Expansion Stage.... 51 4.2 Leveraging IP: Strategies for Obtaining Debt or Equity Funding.... 52 4.3 IP Strategies at the Growth and Expansion Stage Enhancing Your IP Portfolio... 52 4.3.1 Filing a Non-provisional Patent Application... 52 4.3.2 Enhancing Your Portfolio with Trademarks.... 54 4.3.3 Enhancing Your Portfolio with Copyrights... 56 4.3.4 Other Intangible Assets that Can Have Value for a Company... 56 4.3.5 Utilizing Trade Secret Protection.... 58 4.4 Using IP Rights as Leverage in Business... 58 4.5 Partnership Funding/Strategic Investments... 60 4.6 Licensing Intellectual Property... 60 4.6.1 What Is An Intellectual Property License?.... 61 4.6.2 Factors to Consider in an IP License.... 61 4.6.3 License Restrictions.... 62 4.6.4 Consideration.... 64 4.6.5 Maintenance of IP Rights... 64 4.6.6 Other Terms... 65 4.7 Cross-Licensing... 66 4.8 Focus on Marketing, Partnerships, and IP.... 67 4.8.1 Marketing the Company... 67 4.9 Summary... 68
Contents xi 5 Mature, Exit, and Rebirth Stages.... 69 5.1 Reaching the Mature Stage with Your Company... 69 5.2 Consider Expanding Patent Protection... 70 5.2.1 Expedited Patent Examination Options... 70 5.2.2 Continuation and Divisional Patent Applications.... 71 5.2.3 International Patent Filings... 72 5.3 Consider Making Strategic Partnerships... 72 5.4 Exit Strategies.... 73 5.4.1 Being Bought Out... 73 5.4.2 Divestiture of IP... 75 5.5 Rebirth of a Company... 77 5.5.1 Spinning off IP into a New Company... 77 5.5.2 Cross-Industry Applications: Channel Programs... 79 5.6 Summary... 79 6 Achieving Success Stage... 81 6.1 Defining Success... 81 6.2 Signing a Major Customer... 82 6.3 Initial Public Offering... 82 6.4 Acquisition of a Competitor... 83 6.5 Suggested Timeline.... 83 Part II Overview of Intellectual Property Rights for Startups 7 Trademarks and Trade Dress... 89 7.1 Trademarking a Startup s Company Name, Logo, and Domain Name... 89 7.2 What Is a Trademark?... 90 7.3 Choosing and Developing a Brand for Your Startup... 93 7.4 Non-protectable Subject Matter.... 93 7.5 Selecting a Trademark... 94 7.5.1 Brainstorming Phase... 95 7.5.2 Narrowing Phase... 95 7.5.3 Knockout Phase.... 95 7.5.4 Clearance Search... 95 7.5.5 Obtaining a Legal Opinion... 96 7.6 Protecting a Trademark.... 97 7.6.1 Common Law of Trademark... 97 7.6.2 Federal Trademark Protection... 98 7.6.3 State Registration.... 101 7.6.4 International Protection... 101 7.7 Maintaining Trademark Rights... 104 7.7.1 Maintaining Federal Registration... 104 7.7.2 Licensing Trademarks... 105 7.7.3 Assignment of Trademarks... 105 7.7.4 Policing Trademark Use... 105
xii Contents 8 Domain Names... 109 8.1 Securing Intellectual Property in Domain Names... 109 8.2 Domain Name Disputes... 111 8.3 Case Study: Domain Dispute Between Startup Codecademy and Code Academy... 112 8.4 New Top-Level Domains... 114 8.5 New Top-Level Domains and Startups... 115 9 Patents... 117 9.1 Patent Protection as an Intellectual Property Strategy for Startups... 117 9.2 Patentability Requirements in the USA.... 118 9.2.1 Patentable Subject Matter... 119 9.2.2 Invention Has Utility... 120 9.2.3 Invention Is Novel.... 120 9.2.4 Invention Is Non-obvious... 123 9.3 Types of Patents... 125 9.4 Provisional Applications... 128 9.5 Non-provisional Applications... 129 9.5.1 The Anatomy of a Patent Application... 129 9.5.2 Assignment of Patent Rights... 133 9.5.3 Inventorship Versus Ownership... 133 9.5.4 What to Expect: The Patent Application Examination Process... 134 9.5.5 Continuing Applications... 135 9.6 Going Global: International Patent Considerations... 136 9.7 Patent Protection for Software... 137 10 Trade Secrets.... 143 10.1 Secrecy Creates Value: How Startups Utilize Trade Secret Protection.... 143 10.2 What Laws Protect Trade Secrets?... 144 10.2.1 The Uniform Trade Secrets Act.... 144 10.2.2 The Defend Trade Secrets Act.... 146 10.3 Independent Discovery and Reverse Engineering of Trade Secrets... 147 10.4 Theft of Trade Secrets: Misappropriation... 148 10.4.1 Corporate Espionage... 149 10.4.2 Employee Poaching... 150 10.4.3 Cybertheft... 151 11 Copyrights... 153 11.1 Copyrightable Subject Matter... 153 11.2 Scope of Protection.... 154 11.2.1 Software and Apps as Copyrightable Matter... 154 11.2.2 Advertising, Marketing Materials, and Product Packaging... 155
Contents xiii 11.2.3 Training Manuals, User Manuals, and the Like... 156 11.2.4 Secret and Other Materials Including Software... 157 11.3 Ownership and Authorship... 157 11.3.1 Works for Hire... 158 11.3.2 Jointly Authored Works.... 158 11.4 Licensing and Assignment of Copyrights... 159 11.5 Derivative Works... 159 11.6 Fair Use... 160 11.7 Registration Issues... 160 12 Intellectual Property Issues in Labeling and Marketing.... 163 12.1 Government Controls Over Advertisements and Labeling... 163 12.1.1 Federal Trade Commission... 163 12.1.2 State Regulation... 164 12.1.3 Government Controls Abroad... 165 12.1.4 Patent Marking... 165 12.2 Non-government Controls.... 166 12.3 Comparative Advertising... 166 13 Enforcement and Infringement of Intellectual Property Rights... 169 13.1 Policing Your IP Rights... 169 13.2 Evaluating a Controversy Before Commencing Litigation... 171 13.3 Remedies... 172 13.3.1 Injunctions.... 172 13.3.2 Payment of Royalties.... 173 13.3.3 Monetary Damages... 173 13.4 Settling Controversy Without Litigation... 174 13.4.1 Arbitration... 174 13.4.2 Mediation... 175 13.4.3 Licensing Agreements... 175 13.5 IP Litigation... 176 13.5.1 Selecting a Jurisdiction... 176 13.5.2 Causes of Action... 176 13.5.3 Preliminary Injunction... 178 13.5.4 Discovery Stage.... 178 13.5.5 Summary Judgment... 179 13.5.6 Trial... 179 13.5.7 Costs... 179 13.6 Proceedings in the United States Patent and Trademark Office... 180 13.6.1 Trademark Oppositions... 180 13.6.2 Patent Post-grant Review Proceedings... 180
xiv Contents Part III Implementation of IP Strategies for Startups 14 Successful Implementation of a Startup s IP Strategy... 185 14.1 Talk with an Intellectual Property Lawyer... 185 14.2 Confidential Disclosure or Non-disclosure Agreements.... 186 14.3 Assignment of Rights... 188 14.4 Employee Education... 189 14.5 Accurate Record Keeping... 190 14.5.1 Patents.... 190 14.5.2 Trade Secrets.... 191 14.6 Patent and Trademark Searches... 192 14.6.1 Patent Searches... 192 14.6.2 Trademark Searches.... 193 14.7 Choosing the Best IP Protection for Your Startup... 193 14.7.1 Deciding Between Patent or Trade Secret Protection... 193 15 Developing and Managing an Intellectual Property Portfolio... 197 15.1 Developing an Intellectual Property Portfolio Strategy that Fits the Startup s Business Goals.... 197 15.1.1 Identifying Startup Business Objectives and Goals and aligning these with the Startup s IP Strategy... 198 15.1.2 Identification of IP Assets... 198 15.1.3 Periodic Review of IP Assets... 199 15.2 Administrative Issues for Long-Term IP Portfolio Management... 199 15.3 Ongoing IP Diligence: Protecting Rights and Pursuing Others... 200 15.3.1 Defending Your IP... 200 15.3.2 Leveraging Your IP Rights... 202 16 Valuing Startup Companies... 205 16.1 Purpose of a Valuation... 206 16.2 Methodologies... 207 16.2.1 Cost or Asset-Based Approach... 207 16.2.2 Income Approach... 208 16.2.3 Market Approach.... 209 16.3 Normalization of Earnings and Cash Flows... 210 16.4 Impact of Risk on Value and Cost of Capital... 210 16.5 The Uniqueness of Early-Stage Technology Company Valuations.... 211 16.6 Allocation of Enterprise Value to Senior and Junior Equity Interests.... 213 16.6.1 The Current Value Method... 214 16.6.2 The Option Pricing Method.... 214 16.6.3 The Probability-Weighted Expected Return Method... 214
Contents xv 16.7 Leverage and Monetization of IP... 214 16.7.1 Value of IP and Impact on Technology Companies... 215 16.7.2 IP and the Enforcement of Rights... 217 16.7.3 IP Monetization... 217 17 Licensing of Intellectual Property Rights for Startups... 219 17.1 What Is an Intellectual Property License?.... 219 17.2 Factors to Consider in an IP License... 220 17.2.1 Identification of Rights to Be Licensed... 220 17.2.2 Restrictions... 221 17.2.3 Considerations... 222 17.2.4 Maintenance of IP Rights... 223 17.2.5 Other Terms... 224 17.3 Cross-Licensing Intellectual Property... 225 17.4 Licensing Standard-Essential Patents... 225 17.5 Licensing Code and Software... 227 17.5.1 When a Startup Needs Software... 227 17.5.2 When Startup Sells or Develops Software... 228 18 Startup Tips for Avoiding and Preventing Intellectual Property Problems... 229 18.1 Get Legal Advice Early... 229 18.2 Conduct Cost-Benefit Analysis on IP Protections... 230 18.3 Do Things Correctly at the Outset... 230 18.3.1 Protecting the IP You Have.... 231 18.3.2 Evaluate What IP Procurement Offers the Most Value... 232 18.4 Take IP Protection, Policing, and Enforcement Seriously... 233 18.4.1 IP Is Important, so Is Running Your Startup... 233 18.5 Do not Infringe Others IP Rights... 233 18.6 Prevent Contamination of IP Rights... 234 Appendix A... 235 Appendix B... 239 Appendix C... 247 Appendix D... 249 Index... 253
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