IP Funding Strategy: A Portfolio-Based Perspective

for Emerging Businesses

Anna McCoy John Russell

Outline •  General Introduction

–  IP as a value asset - Funding relationship to IP •  From the Funding Perspective •  Minimizing Investor Risk •  Due Diligence of IP for Investment Purposes

•  What is IP? –  Patent – utility/design/examples –  TM - examples –  Copyright - code –  Trade Secret – customer lists and other examples

•  Strategy to acquire IP protection –  Internal mechanisms to create value asset IP –  External Protections for IP

•  Conclusion

IP Relationship to Funding •  Funding Sources look for:

– Value Proposition – Large Investment Return – Exit Strategy

•  Success Markers for Funding Source – Unique Idea/Differentiation – Market Opportunity – Management and Leadership Team – All of these markers are keyed to IP

Unique Idea

•  Define Company’s Proposition through IP

•  Significant technological superiority – What is the value-add of the company?

•  Tangible and Articulable differentiators – Can the IP be defined?

•  Technology break-throughs – Any barriers to entry? IP barriers?

Stages of Commercialization

> Market consolidation > Market expansion

> Market penetration

> Product enhancement

> Sales & distribution

> Product development

> Marketing & research > Prototyping

> Market definition

> Innovation & R&D

Tier 0 Tier 1 Tier 3 Tier 4 Tier 5 Tier 2

Product Development Stage

Risk Of Failure HIGH LOW

R&D Angels /3F’s

Seed

VC/IIF

VC/ Expansion

IPO/MBO /Trade Sale

Tiers 0/1 - Pre-incubation §  Direction §  Collaboration §  Guidance §  Resources etc §  Pre-Seed funding §  IP Creation

Tier 2 - Incubation §  Mentoring §  Seed funding §  Contacts §  Consulting §  Clients §  IP Development

Tier 3 - Post-incubation §  Funding §  Structuring §  Relationships etc. §  IP Growth

Tiers 4/5 - Commercial Maturity

IP Value at all stages

Minimizing Risk from the Funding Perspective

•  Predicting success in start-up companies is very challenging.

•  In general, all investors attempt to minimize the risk associated with investments.

•  Attempts to minimize risk include assessing quality of management, business model risk, market opportunities, and possible returns.

•  A better understanding of a target’s intellectual capital and the value creation it represents helps to manage investment risk.

•  IP considered to identify potential opportunities, developing strategies, and potential for securing returns.

Phase 1: The first or Review Phase is designed to provide a quick indication of potential investment value. The Intellectual Capital column represents a need to determine existing or potential assets by type including: utility patents, process patents, brands, domain names, and a formal employee knowledge base. Commentary address whether these items exist with a quick indication of quality. Phase 2: Review of IP includes a review of key issued patents (and/or filings) noting particular claims of interest – higher level of quality review. Claims reviewed in addition to the summary/abstract. A review is further conducted to understand a potential company's target’s process for determining which patents to file and the steps taken in the prior art search. Such an analysis provides guidance as to the breadth and depth of any IP. Phase 3: At this stage, many investors retain patent counsel or other advisors to conduct a deep dive into the potential investment.

Example VC IP Review Phases

Due Diligence for Investment of Intellectual Property

Types of IP

•  IP Assets derived from a variety of systems – Patent system (Patent laws and regulations) – Copyright system (Copyright laws and

regulations) – Trademark system (Trademark laws and

regulations) – Common law/case law (trade secrets, etc.)

•  When trying to get funding, need to show assets you have, assets in process, and why invest.

General IP Comparison Patent Trademark Copyright Trade Secret

Coverage Ideas Consumer Recognition and Goodwill

Expression embodied in a fixed medium

Business Information

Types •  Utility (provisional and non-provisional)

•  Design •  Plant

Word marks, logos, trade dress

N/A

Requirements New, Useful and Non-obvious

Use in Commerce (US) First to File (foreign)

Originality Valuable, maintained as secret

Term 20 Years from date of filing

Indefinite, if used and maintained

95 years for a corporation

As long as it remains a secret

Limitations on Filing Must be filed within 1 year of public disclosure in US

Search? Recommended Recommended N/A

Period of Examination

Approx. 2-4 years (petitions for accelerated exam)

Approx. 6-9 months Approx. 1-3 months – minimal exam.

N/A

Disclosure Required Yes Yes Yes No

US Patents •  Three types of U.S. patents:

–  1 – Utility patents •  may be granted to anyone who invents or discovers any new

and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof;

–  2 – Design patents •  may be granted to anyone who invents a new, original, and

ornamental design for an article of manufacture; and –  3 – Plant patents

•  may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

Patent Basics

A U.S. patent is a negative right. It entitles the holder, for a limited time, to prevent others from making, using, selling or offering to sell the claimed invention in the United States

What:

File application; Demonstrate to the Patent Office that the invention is: (1) new, (2) useful and (3) non-obvious

How:

(1) Sue for $ and/or injunction

(2) Generate licensing revenue

(3) Cross-license

(4) Enhance defensive posture

Why: (5) Deter competition / construct barriers to entry

(6) Obtain financing

(7) Build portfolio assets with eye toward acquisition

(8) Develop alliances

Example of Method Patent

Example of Method Patent Utility patent example claim (Amazon one-click online shopping method ): A method of placing an order for an item comprising: under control of a client system, displaying information identifying the item; and

in response to only a single action being performed, sending a request to order the item along with an identifier of a purchaser of the item to a server system;

under control of a single-action ordering component of the server system, receiving the request; retrieving additional information previously stored for the purchaser identified by the identifier in the received request; and generating an order to purchase the requested item for the purchaser identified by the identifier in the received request using the retrieved additional information; and

fulfilling the generated order to complete purchase of the item whereby the item is ordered without using a shopping cart ordering model.

(US 5,960,411)

Example of Design Patent

Example of Design Patent

Trademarks Word, phrase, symbol or design, or a combination of words, phrases, symbols or designs, that identifies and distinguishes the source of the goods of one party from those of others.

Trademarks •  The owner, assignee or licensee of a trademark

has the right to exclude others from using that trademark. –  In the U.S., rights in a trademark can be obtained

through commercial use of the trademark. –  In Foreign jurisdictions, rights can be obtained merely

by filing.

•  A trademark right can last indefinitely as long as the trademark is in use and the registration is renewed regularly.

•  Global strategy may be important!

Domain Names

•  Can be trademarks if domain name operates to indicate source

•  Separate registry and ownership system

Copyright •  Documents, art, music, motion pictures, software, etc.

are automatically copyrighted when the document is created.

•  Can register copyright with the government – minimal fee. –  Must be registered before filing any infringement lawsuits.

•  Duration: –  the life of the author plus 70 years; or –  If it was a work for hire: 95 years from publication or 120

years from creation.

•  US Copyright Website: –  http://www.loc.gov/copyright/

Trade Secrets

•  Specialized secret company knowledge – Examples include data, formulas,

compilations, programs, customer lists, etc.

•  Can be used where patents may not have a long enough term or be possible.

•  Trade secrets are kept under lock and key, with restricted access and publications.

Strategy to Acquire Value-Add IP Protection

•  Portfolio-Based Strategy: Portfolio is greater than the sum of its parts

•  Avoid putting all your eggs in one basket Identification of all aspects as potential asset and value generator

•  Two-Step Strategy

Two-Step Strategy 1.  Track and Identify

•  IP Tracking and Summaries •  Invention Disclosure Forms •  Non-Disclosure and Assignment Back

Agreements •  White Spacing and Competitor Searching

2.  File and Prosecute

HOW TO TRACK AND IDENTIFY? •  IP Audits

•  Establish IP team leaders and have regular meetings

•  Raise IP awareness among all team members –  Uses / value / role of patents to company –  Key rules – bar dates, consequences of disclosure

•  Create processes and infrastructure that support innovation –  Brainstorming meetings –  Invention Disclosure Forms –  Internal education

IP Audits

•  Professional review of IP assets •  Mandatory for any funding round, but don’t

wait until you need one to think about it •  Function:

•  Identify value in current IP assets •  Identify gaps in IP coverage

•  Preemptively prepare portfolio for funding due diligence

Internal IP Housekeeping - Agreements

•  Non-Disclosure/Confidentiality Agreements –  Invention Assignment Clause

•  Employment Agreements (Trade Secrets) –  Employment Agreements typically are a condition at hiring –  Often include trade secret & confidentiality language for a

term that exceeds termination from the company. –  Includes IP ownership information (assignment

requirements) –  May include non-compete language to prevent employee

from working for a competitor for a period of time.

•  Independent Contractor Agreements

Field Awareness - Whitespacing

•  Competitor 1 •  Competitor 2 •  Partner? •  Licensee?

Invention Disclosure Forms an important piece of IP infrastructure

•  A mechanism for capturing and recording potentially valuable IP

•  A checklist that functions to repeatedly reinforce key patent law concepts, such as the consequences of public disclosure

•  A tool for improving communication among all team members, including outside counsel

•  Good invention disclosures improve the quality of patent applications and reduce preparation/filing costs

Step 2: Filing and Prosecuting •  Filing for IP Protection

–  Provisional Patent Filings •  NOTE: new patent law went into effect in 2013 – FIRST TO

FILE –  Design filings –  Trademark filings –  International filings – don’t forget utility models

•  Prosecuting IP –  Continual tracking and reevaluations at decision points –  Don’t fear changing direction

Provisional Applications A method of establishing an early priority/filing date

First (1) non-confidential disclosure or (2) actual/attempted commercialization

--------------------------------------------- one year

Must establish priority (file app.)

U.S. / NAFTA one-year grace period

Most Other Countries “Absolute Novelty” (no grace period)

Interested in preserving opportunities for foreign patent protection?

If so, file and establish priority before first disclosure/commercialization

t(0)

Utility Applications •  What is a utility application/non-provisional

application?

•  Key question: How does the application fit within the portfolio

•  Drafting and filing

•  Examination Process

•  Timeline

•  Issuance

Patent Foreign Filings

•  Different types of foreign filings: – PCT Filings – Utility Model Filings – Paris Convention National Phase Filings – Design Filings

•  Selection based on business drivers, not one size fits all

Questions?

Thank You