‘Entrepreneur’ is no longer a dirty word. Once considered a term self-claimed by unemployed middle aged men,[1] entrepreneurism has hit the limelight. With increased accessibility to cost effective business models, passionate individuals can now pursue their start-up ventures. It seems there are bigger things to come, with Richard Branson dubbing 2014 as the Year of the Entrepreneur.[2]
But one thing hasn’t (and won’t) change. Start-ups are cash-strapped and often look to cut corners. Some legal corners, however, can be costly or devastating to the development of a start-up. Here are our top 5 lessons you don’t want to learn the hard way.
1. Freedom to operate
You’ve got it. A unique product idea you’ve been working on for months. A business name that will capture the market. Branding like no other. It was 100% your thoughts, your creation, so how could someone else have something similar?
Unfortunately, it is not uncommon for the same idea to be conceived independently – even the theory of evolution was advanced independently by Charles Darwin and Alfred Wallace. So before money and effort are spent, conduct some searches to see if the market is clear. This should include:
Trade marks
Patents
Designs
Business names
Domain names
Google searches
Yellow Pages/business directories
Whilst you can do many of these searches yourself, a trade mark, patent or design search can be complex and an experienced IP lawyer will offer value with this. For information on the pitfalls of the trade mark process, check this article. An intellectual property (IP) lawyer may also be able to help you work around existing products, so yours doesn’t infringe any intellectual property rights.
Case Study
You are looking to launch a new business and have picked a catchy name. A trade mark search reveals that someone has registered a very similar trade mark in relation to similar products. The name is not in use, so you didn’t notice it in your other searches of the market. Had you developed the business without conducting the trade mark search, your activities may have constituted trade mark infringement. You decide to pick an alternate name, at no cost.
2. Discussing your idea openly
It’s natural to seek validation of your business idea – but be careful about who you discuss it with. Avoid the temptation to drop a few details at a friend’s BBQ or at the races. Doing so is high risk (someone could steal your idea) for no reward (what can you accomplish in that setting). There will come a time when you will spread the word and promote every aspect of your business. That time is after you have the necessary protection in place. Disclosure may mean you cannot get IP protection at all at a later date.
When you need to approach third parties in relation to your idea, there are certain steps you can take. This may include obtaining a confidentiality agreement. Your inclination might be to have a handshake agreement to ‘get the deal done’. But any reputable business with legitimate intentions will not be against maintaining your confidentiality – it’s often in their interests too!
Case Study
You have an idea with potential to transform your industry. Unable to implement the idea yourself, you approach an established company for assistance. You decide to adopt a ‘commercial’ approach, trust the company and not request a confidentiality agreement. Discussions drag on and 6 months later the company takes the same idea, but implements it in a different way. Without an obligation of confidentiality or restraints, you have also lost the window to seek patent or design protection for your idea, and there is no way to pursue the company.
3. The right IP owner
As businesses grow, it’s very easy to postpone the seemingly unimportant. Often we see businesses poorly structured, IP assets registered in the names of individuals and inappropriate entities contracting with third parties. All these can result in the misplaced ownership of IP.
For asset protection purposes, a well-structured business may have a number of interrelated companies, including a trading entity, an employer entity and an IP holding entity. There may also be trusts involved. Setting the right structure up from the beginning is straight forward and can be done without great expense. Modifying later may not be as simple.
As your business grows, its IP assets will develop and increase in value – whether it’s the trade marks/brand name, a patent, software, copyright materials or confidential information. If ownership does not reside with the correct entity, any subsequent transfer may trigger tax liabilities. Assets registered in an individual’s name can also expose you personally to unwanted litigation.
Case Study
Realising the importance of a trade mark, you decide to file one for your start-up business. You apply in your own name and registration is granted. Years go by without issue, and the reputation of the trade mark develops – as does its value. One day you receive a letter claiming your trade mark infringes the rights of a competitor’s trade mark. As the registered owner, the allegations are against you personally, rather than your company. Transferring the trade mark out of your name is simple, but the transfer will trigger a capital gains event for which a value will need to be attributed to the trade mark.
4. Using contractors
A lot of start-ups engage contractors to develop IP for them, including:
websites
software
business logos
marketing materials
These agreements may either not clarify which party is to own any IP created, or may in fact specify that ownership remains with the contractor. This may leave you paying for something you do not own. Also, often an author’s moral rights are not addressed, which can lead to difficulties if you want to modify the materials.
Case Study
Your business engages an IT company to create your website. There is no written agreement around how the website should be developed or ownership of content. The developer registers a domain name on your behalf and constructs a poorly presented website. A minor dispute ensues, but ownership (and therefore control) of the domain name remains with the website developer. Years later, you have not yet regained control of your website.
5. Use of someone else’s contracts
We regularly see businesses use a document that has been created by another company or has been purchased from the internet. Whilst sometimes there may be no problem with this, it is fraught with danger.
The big issue with using someone else’s document is that you don’t know where it has come from. You don’t know the competency of the drafter, their intention or the purpose for which the document was prepared. If the document is from previous dealings with a third party, it is likely to be favourable to them, not you, and therefore won’t afford you sufficient protection.
A new craze seems to be purchasing documents online. Laws vary enormously between countries, particularly Australia and the US. You should steer well clear of US style agreements. Even agreements obtained from Australian sites will only be in template form – meaning there is no consideration of your industry or your business’ particular IP.
Case Study
Your new business operates in the professional services industry, where your internal processes and training materials give you the competitive edge. An industry player offers to work collaboratively to expand the services your offer and the territory you operate in. Jumping at the business opportunity, you purchase an online pro forma confidentiality agreement. As the project develops, the other party starts approaching your clients. You terminate the arrangement, but they refuse to return the materials and continue to prosper through use of them. The template confidentiality agreement was not appropriate for your circumstances as it fails to address the misuse of client lists, the collaborative use of IP and the consequences of termination.
Every start-up business will have different priorities and you will need to make some tough commercial decisions. Each case study is based on events we have seen unfold. So before rushing ahead, you need to weigh the cost of doing it right with the risk of getting it wrong.
Download a PDF version of this article here: 5 tips from an IP lawyer to protect your start-up business
If you have any queries about these 5 tips or would like advice in relation to your start-up business, you can contact:
Michelle Dowdle
Special Counsel
T +61 3 9611 0114| M +61 408 674 256
E: mdowdle@sladen.com.au
[1] http://www.afr.com/p/business/companies/five_reasons_why_now_entrepreneur_IFILnXkQxQ9z2OwMw4PVAP#!
[2] http://www.linkedin.com/today/post/article/20131211143548-204068115-big-ideas-2014-the-year-of-the-entrepreneur