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No
Protectable IP? Maybe No Funding
by Stephen Furnari
I
was recently a presenter at a conference on raising investment
capital for early stage and emerging companies. One of my
co-presenters, John Ason, is an angel investor and the other
presenter, Jonas Wang, Ph.D., is a partner in Sycamore Ventures, a venture
capital fund.
In their presentations, both John and
Jonas described their funding criteria, which was fairly
textbook for an angel investor and venture capitalist. John
invests in early-stage, pre-revenue companies where his
technical and business background can provide some value-add
to management, and Jonas invests in later stage opportunities,
for example a B, C or D round financing.
What I found
unusual about John's and Jonas' funding criteria was that they
both require an investment candidate to have intellectual
property that is patented (or patentable) as a condition to
funding. That is, if a company seeking capital does not have
patentable IP, neither John, nor Jonas, will consider the
company as an investment candidate.
Quite often, early
stage investors prefer investing in companies
with exciting intellectual property, or the existence of
unique intellectual property forms an important part of an investor's
overall investment decision. However, this was the first time
I had heard investors say definitively that they wouldn't even
consider funding a company if it did not have patentable
intellectual property.
This made a bit more sense to me
with respect to Jonas, whose venture capital fund invests in
only med-tech, biotech and pharmaceutical deals--companies
whose success and failure rides on their scientific inventions
and ingenuity. But the criteria made less sense to me with
respect to John, who proclaims to be industry agnostic and has
invested in deals that range from toys to new media and
software.
According to Amy Goldsmith,
a patent attorney with Gottlieb, Rackman and Reisman, P.C.,
investors prefer companies with patented (or patentable)
technology for two reasons. First, in order to obtain a patent
from the United States Patent & Trademark Office (USPTO),
the governing body that issues patents in the United States,
the company has to prove that its idea or invention is useful,
new and that the technology is not obvious from what has been
done before. In essence, the invention is prescreened by the
USPTO to have good chance of being economically viable and
that it is something that hasn't been seen in the marketplace
before. Good news for investors.
The second reason
investors prefer companies with patentable technology is that
once a patent is issued, the company has the exclusive right
to use that technology for a period of 20 years. That is,
management can prevent any other person or entity from
exploiting their technology for commercial gain, reducing or
eliminating competition.
For an investor like Anson,
who expects that only one in 10 of the companies he funds will
ever produce a return on his investment, patentable technology
is one of the principal ways he increases his odds for a
successful exit. "Most of the companies I fund are two people
in a kitchen or garage" claims Anson. The companies Anson
invests in need every competitive advantage they can get to
survive. A "keystone" or "fundamental" patent, business terms
for very strong patented technology, keeps competitors out of
the market.
As opposed to a company with an
"execution" business model, where the company's success hinges
on management's ability to execute their business strategy
faster, bigger and cleaner than their competitors (and where, however, a
competitor can easily jump into the market to compete), a
company with a business model built around one or more pieces
of patentable technology can stop everyone in its tracks that
tries to duplicate its products or services.
Says
Anson, "unlike an execution company, if a company with a
business built around a keystone patent makes mistakes or even
fails in the execution of its business plan, it can still
survive."
Interestingly enough, Amy Goldsmith notes
that she rarely, if ever, sees funded early-stage companies
that have patents at the time of funding. The patent
office is so delayed with respect to its evaluation of patent
applications (according to Goldsmith, it can take three to
four years for a patent to be issued), that companies are
frequently past the early stages of their development by the
time a patent is issued.
In lieu of having an actual
patent issued or a patent application pending, Goldsmith
suggests that VCs and angel investors may require funding
candidates to retain a patent attorney to perform a
"patentability search" prior to, or as part of, the investor's
due diligence investigation. During a patentability search,
the attorney researches the USPTO's database of issued and
pending patents to see if someone else has previously applied
for or received a patent for the technology in question. The
result of the patentability search will determine whether a
company has a good chance of obtaining a patent or if they
need to scrap the idea and move on. Investors will rely on the
results of this search when determining whether or not to
participate in a deal.
John Anson is a bit more
forgiving when it comes to requiring patentability searches or
pending patents when he assesses a candidate for funding. Patent
applications can be costly to prepare and often start-ups do
not have the cash to pay for searches and applications. In
this case, John relies on his extensive technological
background to make his own determination as to whether the
company's technology has a reasonable chance of obtaining a
patent. He researches the USPTOs database much in the same way
that a patent attorney would. This information is available to
the public for free at the USPTO's website (www.USPTO.gov).
According
to Dr. Wang in his presentation at the conference, the type of
patent you obtain is also an important factor when investors
assess whether they will make an investment in your company.
The USPTO issues several kinds of patents, including design
patents that protect the ornamental design of a functional
item such as jewelry, furniture, beverage containers and
computer icons; utility patents that protect the functionality
of a given item; software patents; and biological
patents.
However, according to Dr. Wang, investors have
a certain amount of disdain for business method patents, which
are a class of patents that disclose and claim new methods or
processes for doing business.
Amy Goldsmith concurred
with Dr. Wang's assessment. It seems that the USPTO previously
issued a significant number of business method patents and, as
a result, patent owners had difficulty enforcing their rights
under the patents. Further, according to Anson, because the
description of the technology or method underlying the patent
becomes public information within 18 months from filing,
competitors can study a company's business process and fairly
easily design another process to go around the patented
method. This actually puts the patent holder at a disadvantage
as compared to never obtaining the business method patent at
all.
The public's easy access to your technology when
you file and obtain a patent strikes a nerve with some
entrepreneurs. I spoke with an entrepreneur recently who was
holding off on filing any patent applications until he
achieved some commercial momentum with his invention. He
feared that once the details of his invention became public
that a company in some far reaching province in Asia may try
to steal his technology. Instead, he was going to rely on
keeping his invention a trade secret for the time
being.
Says Goldsmith, "depending on how easy your
invention is to duplicate, there definitely is some truth that
if your invention takes off, certain companies will copy it."
If you haven't filed in Asia for a patent protection to
prevent your invention from being copied, you will have little
recourse.
According to Amy, the problem of enforcing
patents in Asia is improving, but still isn't great. "It will
be another five to 10 years before we see a legal system
that's capable of enforcing patents, but it is getting
better."
My conversation with Amy Goldsmith was
enlightening, and I learned a number of new things that would
be important considerations for companies who want to protect
their IP. These include:
- Budget. Make sure you have a budget in place to
pay for searches and patent applications, which can start at
$10,000.
- Timing. You only have one year from the use of an
invention in commerce to file for your patent. If you're
thinking of filing, give yourself enough time to do searches
and prepare the application.
- Scrutiny. According to Goldsmith, nearly 99% of
patent applications will initially be rejected by the USPTO.
The applicant (or his or her attorney or agent) must then
appeal to the USPTO in order to demonstrate why the
invention is patentable. This second step to the patent
application process can be costly and is an expense that
will be in addition to the $10,000 fee for services related
to the application process.
- Expertise. Given the high percentage of patent
applications that get bounced by the USPTO after the initial
filing and the fact that you cannot make changes to an
application (except to fix grammatical errors), even if you
have a technical background, it's in your best interest to
retain patent counsel to prepare your patent
application.
- Ownership. Patent applications can only be filed
in the name of a person who invented the patent, not a
company's name. Therefore, if your employee has created an
invention for your company, then you need to have invention
assignment language in an employment contract or have at
will employees (those without an employment contract) sign
an assignment of inventions agreement.
- Monitoring. Because the US system for protecting
patents is one of exclusion-no one else has the right to use
the technology--it is the patent owner's responsibility to
make sure that others are not infringing on issued patent
rights. It is prudent to put a system for monitoring your
patented inventions in place and have a budget for enforcing
your rights.
Interested in starting or funding a company that has a
business model built around a piece of patented technology?
Got concerns about protecting your intellectual property?
Consider attending the seminar we are sponsoring on May
9, 2008, called "Patents & Trade Secrets: How to
Protect Your Company's IP".
Amy Goldsmith will be our featured speaker. Details are
included in this month's newsletter.
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UPCOMING FIRM EVENTS
Furnari Scher Educational
Seminar
Patents & Trade Secrets: How
to Protect Your Company's IP
Patent attorney, Amy Goldsmith, discusses the
essentials of using patents and trade secrets to protect
your IP and attract investors.
May 9,
2008
8:30AM - 10:30AM
The Association of the
Bar of the City of New York
42 West 44th
Street
New York, NY 10036
Program Fee: $49
(free for clients)
Space is Limited to 50
Click HERE to reserve your spot!
Practice Development
SeminarAdrian Miller, a highly recognized speaker and
sales consultant, will lead a fast-paced, interactive
roundtable where she discusses tips and tactics to make
practice development a reality. Adrian will discuss:
- Using subtle but strong practice development
techniques
- Influencing prospective clients' buying decisions
- Persuading clients to offer referral business
- Using your services as a practice development
activity
- Turning every call in to a value added call
April 23, 2008
8:00AM -
9:30AM
Furnari Scher LLP
11 Broadway, Suite
615
New York, NY 10036
Program
Fee: $20
Click
HERE to reserve your spot!
2008 Life Sciences Industry Summit
The 2008 Life Sciences Industry Summit is a
premier one-day gathering for key industry professionals
to interact and discuss issues of strategic importance
to the future of the life sciences
industry.
Stephen Furnari is moderating the Panel
Discussion on Marketing & Fundraising
June 5,
2008
8:00AM - 5:00PM
Hilton Huntington Long
Island
598 Broadhollow Road
Melville, NY
11747
Click
HERE for more information
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IN THE NEWS
Stephen Furnari appears in an article
featured in Compliance
Week
"Going
Private Wisely and Profitably"
April 7,
2008
Companies struggling with Sarbanes-Oxley
compliance, shareholder activists, and turbulent credit
markets often dream of a private equity firm swooping in
and whisking them away from it all. It takes a lot of
hard work, however, to go private, the right
introductions must be made, companies must face tough
questions from analysts and often times have to satisfy
a myriad of regulatory and other legal
obstacles.
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QUICK TIP:
Getting into bed with
someone...professionally
speaking?
In the last month, we've fielded no fewer than
five calls from entrepreneurs who were desperate to get
out of problematic business partnerships.
Problems have ranged
from partners not putting up their fair share of "sweat
equity", divergent viewpoints on business direction,
partners who disappeared and went incommunicado, to
one instance where a minority partner was removed by the
majority partners from an LLC without
notice or a meeting of the members.
Thankfully, most of
these issues settled amicably, but two are heading to
litigation, a costly and time consuming
endeavor.
A business partnership is fraught with
uncertainty and risks that you might not be aware of.
Have you considered what would happen to your business
if a partner dies, becomes disabled, gets divorced or
goes bankrupt? What if a partner wants to withdraw from
the business or sells his or her equity in the business
to someone you didn't want, or expect, to be partners
with? What if a partner prevents you from selling your
equity in the business? Have you considered who will
have control over major business decisions or what may
happen to your business if you and your partner have
equal control and you have a stalemate on a major
decision? No matter what legal form your business is in
(corporation, partnership or limited liability company),
business partners must have an agreement which
protects the business and each partner from these
uncertainties and provides a framework for how
these situations may be resolved.
Get a jump start by
taking a look at our Business Partners Questionnaire, a
useful tool to help you get the conversation
started.
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ABOUT THE FIRM:
Furnari Scher's attorneys are entrepreneurs, so
we understand what business owners need from a law firm.
At Furnari Scher, our expert team of corporate
and securities lawyers specializes in helping business
owners with the legal aspects of raising capital, buying
and selling businesses, structuring corporations and
partnerships, protecting intellectual property, and
reviewing and negotiating contracts.
Our
business-oriented approach to the law is why we take a
special interest in startups and emerging growth
companies and the needs of their investors,
broker-dealers, investment advisors and investment
funds. In short, we work with the kind of people who
make things happen.
It's also why we're proud to
stand behind this one simple pledge:
- Your money will not be wasted.
- Your time will be respected.
- We will add real value to your business.
- You will always get superior
service.
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