Tom Williams of McGarry Bair
In Part 1 of the interview, Implications of IP for Angel Investors, patent attorney Tom Williams (@RealGTom) of McGarry Bair (@McGarryBair) provided a summary of various forms of intellectual property (IP) and explained how IP produces money-making opportunities.
Here, he’ll talk about several common mistakes startups make, provide an overview on IP insurance, and point out why most startups don’t have such insurance.
IP is one of the most important considerations when seasoned investors evaluate an investment opportunity. They want to make sure the potential investee 1) hasn’t infringed other companies’ IP and 2) has taken reasonable measures to defend its competitive edge by protecting its IP.
Looking at some of the most common IP mistakes startups make could provide insights into how they might jeopardize your investment.
Williams points out that startups often
If the startup outsources code development or other content to a third party, the startup should have agreements in place to address ownership. As Williams notes, “outsourcing can create ownership in that third party.” You want to make sure your investee, not the third party, owns the IP.
And if the startup’s patent attorney is hired based on low fees, it might imply that the IP counsel isn’t properly compensated “to spend enough time to adequately evaluate the IP and place appropriate protections in place,” he continues.
As an IP-conscious investor, you may want to clear the above with the potential investee before making your investment decision.
What’s the worst mistake of them all? William says it’s disclosing or discussing the product openly before seeking legal advice from a qualified IP attorney.
He explains:
In the United States, companies have a year from the first disclosure or offer for sale to file a patent application.
But in some countries, any disclosure before filing will forfeit their patent rights.
Sometimes, even a pitch to an investor, which discloses enough of an invention, can compromise US and foreign patent rights.
This means that once the founder/inventor has put its invention/technology in the public domain, such as pitching to you and other investors, there’s a chance that it’d invalidate the patent application.
It sucks to know that the product you totally dig might not receive IP protections in the future, all because the startup hasn’t filed a patent app before her pitch. At the minimum, the company should have filed a perfunctory provisional patent application, suggests Williams.
Reciting some of the unfortunate meetings his firm’s had with clients, Williams shares:
Some of the worst meetings I can remember are ones where an inventor has made a fatal disclosure of an invention before protecting it and we have to tell the inventor that his/her invention is free for the world to use.
Ouch.
IP insurance typically insures against lawsuits by a company’s competitors. It provides a vehicle to assist and/or fund the prosecution or defense of IP-related infringement lawsuits, shares Williams.
If you’re thinking about requesting potential investees to obtain IP insurance, check out what Williams has to say:
Insurance coverage can be expensive. Many startups simply don’t have the resources to put towards one or more policies.
Sometimes IP insurance companies require that a certain level of due diligence be performed — typically by IP counsel — which includes searches, and filing patent and trademark registration applications.
So even if startups have the funds to obtain IP insurance, they often get rejected because of the speculative nature of their new market or product, or the existence of a substantial competitor in the market.
That said, we’ve handled cases for clients that had insurance. They were able to obtain financial assistance under their policy to defend a lawsuit against a competitor, which they otherwise wouldn’t been able to defend.
Stay tuned for Part 3 of the interview, where Williams explains how IP attorneys can help in the investment process and tells the differences between IP attorneys and patent attorneys.
* For series, references are published in the last installment of the series.
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