A tech startup needs its intellectual property (IP) attorney to be not only a legal expert, but also a great personal trainer who understands how the startup’s particular IP needs change with the startup’s different growth stages. Attorneys who lump tech startups together, without considering their stage of growth, risk giving the wrong advice at the wrong time.

The vignettes below, recounted through fictional characters and businesses, introduce several tech startups from idea stage to full maturity, setting the stage for key IP considerations at each stage.

Something from Nothing: The Idea Stage

Sunil, calling from the office of his startup, “How much will it cost?”

With only the most general description of Sunil’s invention, I ballpark a high estimate for the new patent application. In the pause, and after what might have been a slight gasp, ambient noise from his “office” percolates through the line. “Soy milk caramel macchiato for Sunil. . . . Thank you, sir.”

How did startups ever function before coffee shops?

Sunil has an idea stage software startup.¹ His company’s assets are an idea and a laptop. Sunil needs a personal trainer for his intellectual property, someone to give him targeted advice on what additional steps his particular startup needs to take before it can create property rights out of the idea: utility patent rights, trademark rights, design rights, and copyrights.

Typical of startups in the idea stage, Sunil needs an IP attorney to confirm the basics of what he has learned online, but with his own situation blended in. By the time I ring off, I want Sunil to know at least these key points:

• Provisional patent applications should be filed early and perhaps often. I have seen some startups file new provisional patent applications frequently, especially when the product or service is evolving. In addition to providing priority for the nonprovisional, the collection of provisional applications may themselves evolve into the nonprovisional and thus save time and money.
• Nearly every idea stage startup has the notion that a prefiling prior art search is required. Here, common sense and reason may dictate what the United States Patent and Trademark Office rules do not. Some idea stage startups will give up seeking a patent after seeing the prefiling prior art result. Nearly all idea stage startups will benefit from the way the search results focus and sharpen the idea. The prior art search can also alert the startup to previously unknown competitors.
• If the idea involves a graphical user interface (GUI), keep design patent protection in mind. Of the 34 countries with developed IP systems, 33 permit design protection for GUIs.² In the United States, where the current contour of statutory subject matter in utility patents is hard to trace, many GUI design aspects are unquestionably protectable.³
• Seeking IP protection outside the United States is complex and expensive but must be discussed in the light of today’s global economy. Idea stage startups need to understand the limits of their protection. If they really will need protection abroad, they should plan it into their future fundraising.
• Trademark rights require actual use in commerce, but explore intent to use.
• Copyright attaches to original works of authorship without registration, but registration has benefits. Given Sunil’s short list of assets, he will want to revisit this later.
• There are right and wrong ways of coping with the struggle between keeping the idea secret and sharing it. Software tech startups in the idea stage may be concerned that maintaining secrecy will stifle their ability to quickly get to market or to start crowdfunding. Other software tech startups may be less concerned with secrecy because software inventions often have a life expectancy that is short compared to the time it takes to obtain a patent,⁴ and many have serious post-Alice⁵ questions as to the wisdom of spending on software-related patent applications.⁶ Life science tech startups, on the other hand, usually start out with a much longer view of patent protection.⁷ Sunil needs some guidance, from the perspectives of marketing and collaboration, on how much he can share freely, and what should be shared only with a nondisclosure agreement (NDA) in place.

Working with idea stage companies is rewarding. With companies like Sunil’s, I get to practice a kind of transcendental alchemy, to Rumpelstiltskin the client’s mental straw into virtual gold.

Then again, Sunil’s future virtual gold has no real-world analog for me unless and until I sign him as a client. Until the formal engagement, the time training an idea stage startup on IP law is pro bono time. Nothing against pro bono time, but when I lend one ear to Sunil’s call, the shrill stage whisper of the billable hour is always audible in the other.

Fortunately, attorneys can right-size the pro bono time by remembering that idea stage startups are like small tornadoes, spinning in every direction at once. The typical idea stage startup can look our direction for only so long before something else catches their attention. They can absorb only so much at a time. Although they need to know the basics of several topics, they will not benefit by a deep dive, not yet. That can wait until later. It is enough that the startup, now suitably aware of the issues, knows where to turn when those issues become more relevant.

Some idea stage startups never advance. Many evolve to further stages. As they grow and change, so too does the nature of advice they must have. The first big change comes when they start to seek funding.

Pre-Seed and Seed Stage

Jason is driving to a trade show and chatting with me about his company. I just let him know an office action came in on one of his three or four pending nonprovisional applications.

“That’s great news! I was thinking it would be another year at least. Let’s talk about that after the trade show. I mainly called today because we are looking at hiring maybe a couple of programmers and an assistant for me.”

“Congratulations,” I say. “It sounds like you got the funding you mentioned.”

Jason’s company is starting to grow in a tangible way, but whatever I explained to him about the patent process two years past needs to be revisited. Jason’s startup has no product yet, but a product is at least closer now that he has some funding.

Startups commonly raise money through several rounds of financing.⁸ Initially, funds for a startup often come from the founders, their family, and friends (FFF).⁹ This personal type of fundraising accounts for over $60 billion per year.¹⁰

After the FFF financing stage, startups approach the pre-seed stage. The term “pre-seed” is the new name investors are calling startups seeking funding in the range of $750,000 or less.¹¹ The pre-seed stage startup is on the grow and able to attract investment from strangers, especially a small but growing set of funds that exclusively invest in the pre-seed stage.¹² Among the well-known U.S. companies that started with what would today be called pre-seed rounds are Uber, Airbnb, and Pinterest.¹³ The share of the money claimed by intellectual property will vary with the type of company. For example, Uber currently owns close to 400 U.S. patents, with over 100 applications pending,¹⁴ not to mention significant copyright and trademark holdings.¹⁵ Airbnb, on the other hand, has eight patents, and Pinterest has two patents but substantial investments in trademarks.¹⁶

A pre-seed startup, after registering some product growth and traction, moves on to seed stage financing. In seed stage financing, startups may raise several million dollars from funders who typically invest up to $1 million each. The seed stage money is usually what the startup uses to advance its product to launch.¹⁷

Jason’s pre-seed startup needs advice on several issues that were not as germane in the idea stage.

• Asking others to sign NDAs was a good practice in the FFF round, but venture capitalists (VCs) never sign NDAs.¹⁸ Having patent applications already on file before giving a pitch reduces most of the disclosure risk.
• When onboarding the first employee, the startup’s employee handbook must already address intellectual property by spelling out ownership of new inventions and copyright, employee confidentiality obligations, and company ownership of trade secrets and electronic communications.
• Hiring independent contractors, especially artists, designers, and coders, requires scrutiny be paid to the contracting agreement because the intellectual property they create will not automatically belong to the startup.
• In the light of how the product is progressing, what aspects are useful to copyright?
• The cycle between IP application and grant is relatively long. Jason’s product plans have mutated a dozen times since we first spoke, and may do so again after today’s call. To cope with the long cycle, Jason and I need to review his company’s pending patent applications for harmony with the product’s ever-pivoting direction. For example, the applications on file might not include some of the changes and improvements in the product, and Jason may need to file applications on these recent innovations.
• Even though Jason’s startup has no product and no patent as of yet, it is not too early to discuss how the former will be marked with the latter and why marking is required.

The several years of working with Jason have yielded an exciting handful of IP-in-progress and a shared enthusiasm for their potential. We want each application to be found worthy of a deed, or multiple deeds, to a new tract of previously unclaimed intellectual property. The shared journey has made me invested—personally, not financially—in the company’s continued survival and the prospect of bigger things to come for Jason’s startup.

Startups, whether pre-seed or seed, are always looking down the road at the next funding rounds, typically known as Series A and beyond.

The Established Startup

“Ouch! But does that budget include the maintenance fees?” asks Ron. Ron has been around startups long enough to have a good feel for the types of costs to expect in an IP budget, and his question shows sophistication. He is the chief financial officer in Janice’s well-established startup of 50 employees.

“Yes,” I say, “the amount here includes the one U.S. case that has an open maintenance fee window, and also annuities for the foreign cases.”

Successful startups like Janice’s often grow through infusions of capital in Series A, Series B, Series C, and subsequent rounds. The Series A round can range anywhere from $2 million to $15 million,¹⁹ Series B is frequently in the range of $7 million to $30 million,²⁰ and Series C rounds are simply the next in the series of what may be an arbitrary number of further rounds.²¹ After the final, nth round of financing, the now well-established company may continue on to an initial public offering (IPO).²²

Glassdoor.com provides an example of multiple funding rounds.²³ Glassdoor’s service is a company ratings site that collects salary and other information from employees of large companies and displays the data anonymously. Their seed round in 2007 was for $610,000. Over the next eight years, they raised the following funds in series rounds: $3 million (March 2008), $7 million (December 2008), $12 million (March 2011), $20 million (October 2012), $50 million (December 2013), $70 million (January 2015), and $40 million (June 2016).²⁴ Their IPO is expected in 2018.²⁵

The key counseling points for the well-established startup focus on the institutional aspects of intellectual property.

• Asset review will save money. The company’s decision makers, in a committee setting, have to have the authority to terminate assets no longer of interest. It sounds like a spy movie, but the assets are IP assets, both in process and granted. An established startup has too much going on to handle these assets in a casual way, and too little money to fund everything. The answer is for the company to schedule the time and people to deliberate over whether continuing to fund a given case or effort is worth the cost.
• Continuing patent applications maintain the opportunity to flex the claims. The patent claims are drafted before the technology they cover is fielded. The scope of IP protection from a first granted patent rarely squares with how the technology is embodied a few years later when the market starts to develop. Keeping a continuing patent application on file helps cope with this time-delay problem and allows the drafting of claims that more closely track the products actually in the market.
• A system of incentives will encourage employees to submit invention suggestions. Where employees know their inventions belong to the company, they have no particular interest in helping the company grow its IP portfolio. Incentives help overcome the natural tendency of employees to focus more on their own tasks, giving them a reason to put their inventive ideas in the company’s hands.
• An IP holding company should be considered for its tax and sheltering benefits.²⁶ IP holding companies are not for every company, but some larger companies use them. An established startup may consider an IP holding company solely for its possible protection against judgments. For example, Janice and her co-owners own two companies: her established startup and an IP holding company. Suppose the startup suffers a high dollar adverse judgment in tort or contract lawsuit or the like. The judgment against the established startup is unlikely to reach the assets of the IP holding company, so at least the ownership of the intellectual property can survive even if the startup does not.²⁷

The well-established startup benefits by an engaged outside counsel. It is easy for the leadership at companies in this stage to get overconfident or careless with their intellectual property, thinking everything is covered. Janice, whether she knows it or not, actually needs my advice more frequently than Sunil or Jason did.

Bootstrap Startups

Not all startups go the financing route. Some choose to grow slower, withdrawing from their savings accounts, invading their retirement, remortgaging their homes, maxing out their credit cards, living off their day jobs, and (if success follows effort) plowing the profits from their startups back into the business. This is called “bootstrapping,” which means launching a venture with the principal’s own money.²⁸

In 1992, one Silicon Valley CEO complained, “Raising money has become a disease. Entrepreneurs are wasting lots of brainpower scheming to raise money.”²⁹ Almost 25 years later, even though VC funding is as high as ever (setting a record in 2017 with more than $148 billion invested³⁰), bootstrapping is still seen as having the advantage of retaining control in the founders and positioning that makes a bigger splash when and if they choose to seek VC money.³¹ As noted more recently in the Harvard Business Review, “For the great majority of would-be founders, the biggest challenge is not raising money but having the wits and hustle to do without it.”³²

The bootstrap startup needs the same information as the startup that obtains funding, but with a twist in timing.

• Bootstrap startups advance more slowly.³³ When they run short on money, everything stops. Working with bootstrap startups requires extreme patience.
• Bootstrap startup founders tend more toward do-it-yourself. Expect them to have filed a number of provisional patent applications before they make their first call to ask for help with a nonprovisional patent application, and usually about two weeks before the priority date will pass.
• Lacking the sudden capital infusions of VC-financed startups, bootstrap startups are more acutely focused on cost at every step. Do not be surprised if the bootstrap founders have written a draft of the nonprovisional application and finalized the drawings themselves.

Founders who elect to bootstrap are tough customers. It’s all their money, and they expect their attorneys to be up front about costs with no surprises.

Enforcement Stage

“It’s Peter from Iniventure Corp. for you,” says the receptionist.

Iniventure . . . we secured them a very nice patent a few years back. Clever idea, good claims, short prosecution history. I am surprised to hear from Peter again since his company seemed like a one-idea enterprise.

The call comes through. Peter is distressed. “No, the company’s doing fine, but now some big players have entered the field and we need your help dealing with their infringement.”

A startup of any size or maturity can end up in an enforcement stage. No startup has money set aside for IP enforcement. Their money is all dedicated to fielding a product or service, improving it, supporting it, or developing the next generation of it. Litigation is not what founders typically look for from the startup experience.

Nevertheless, intellectual property is not self-enforcing, so some startups must engage and, if all else fails, must litigate. The startup confronted with an enforcement situation needs be counseled, first and foremost, about the possible impact of certain options that may seem to the startup to be sensible.

• Attacking alleged infringers through newspaper editorials, blog posts, or advertisements is unwise and can cause more mischief than it solves.
• Making infringement charges through public forums or forums hosted by the competitors exposes the startup to negative publicity and charges of interfering with the business of the competitor.³⁴
• Tough-sounding letters or e-mails are another option that may have unintended consequences such as having to face an action for declaratory judgment of noninfringement or of patent invalidity.

Another important point that startups should be made aware of is the existence of a thriving litigation funding industry that funds cases in IP law. In the right situations, these third-party funders make it possible for startups to get into courtrooms that would otherwise be financially out of reach.

In discussing Iniventure’s options with Peter, I cover the points below on third-party funding:

• To preserve privilege to the extent it can be, Peter should use an attorney to approach any prospective third-party funders.
• Although the merits of Iniventure’s claim will be important, funders find it most efficient to limit their reviews to claims whose realistic trial-level damages surpass a certain minimum threshold. Some funders, for example, set the threshold at $20 million.³⁵
• Litigation funders understand risk, conduct a thorough diligence analysis to minimize risk, and avoid risks that cannot be minimized. They pass on many decent opportunities in favor of ones that seem more likely to be profitable.³⁶ Securing litigation funding for Iniventure will take some time since the third-party funders diligence process may take six or more weeks.

Helping the startup to decide whether to enter an enforcement effort is another situation in which some pro bono time is warranted. When the idea stage startup first reached out several years ago, they knew very little about IP acquisition; now they have some intellectual property, but they know very little about IP enforcement. Helping them take the right steps now will ensure the long-term survival and prosperity of the startup, at least within the limits of how far their own talents can take them. Conversely, taking the wrong steps can prove catastrophic for the startup. Imagine your small startup client gets its first patent, and then on its own sends out cease and desist letters to all known competitors. When even one competitor files an action for declaratory judgment of noninfringement, in a venue several states away, or perhaps clear across the country, your small startup client is dragged into a litigation they did not knowingly choose and for which they were unprepared.

Beyond Startup

Eventually, Janice’s company will hire in-house IP counsel who will take over my role as trusted advisor. No more meetings to join or budgets to plan, but I will miss it. Janice’s company’s success was always the goal, and this ending was part of the plan all along.

When your startup clients go beyond startup, your personal training is done. They can take it from here. Whether they reach the lofty heights of their ambitious dreams or not depends on them, and on chance, and on trends and timing. To the extent their success depended on intellectual property, however, you know you gave each and every one exactly what they needed, and just when they needed it.

Endnotes

1. The two main types of tech startups that are relevant to venture capitalists are software and life science, with new software startups outnumbering new life science startups by a ratio of at least five to one since 2012. See Bruce Booth, A Tale of Two Startup Worlds: Biotech and Tech VC Ecosystems, Forbes (May 9, 2016), https://www.forbes.com/sites/brucebooth/2016/05/09/a-tale-of-two-startup-worlds-biotech-and-tech-vc-ecosystems.

2. World Intell. Prop. Org. [WIPO] Standing Comm. on the Law of Trademarks, Indus. Designs & Geographical Indications, Compilation of the Replies to the Questionnaire on Graphical User Interface (GUI), Icon and Typeface/Type Font Designs, Annex 1, at 3, WIPO Doc. SCT/36/2 (Aug. 31, 2016), http://www.wipo.int/edocs/mdocs/sct/en/sct_36/sct_36_2.pdf.

3. See Ass’n Internationale pour la Protection de la Propriété Intellectuelle [AIPPI], Protection of Graphical User Interfaces: Report of United States National Group, at 3–4 (May 8, 2017), http://aippi.org/wp-content/uploads/2017/05/2017_US_Study_Question_Protection_of_graphical_user_interfaces_2017-05-08.pdf.

4. Eric Goldman, The Problems with Software Patents, Forbes (Nov. 28, 2012), https://www.forbes.com/sites/ericgoldman/2012/11/28/the-problems-with-software-patents.

5. Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014).

6. H.O. Maycotte, To Patent or Not to Patent: That Is the Question for Startups, Forbes (Jan. 12, 2016), https://www.forbes.com/sites/homaycotte/2016/01/12/to-patent-or-not-to-patent-that-is-the-question-for-startups.

7. See Eric K. Steffe & Timothy J. Shea Jr., Protecting Innovation in Biotechnology Startups, Bioentrepreneur (June 23, 2003), https://www.nature.com/bioent/2003/030601/full/bioent741.html.

8. Rob Go, What Are Pre-Seed Rounds and Why Do They Exist?, NextView Ventures Blog (Jan. 26, 2016), https://nextviewventures.com/blog/what-are-pre-seed-rounds.

9. William D. Bygrave, Founders, Family, Friends, and Fools, Bloomberg (Sept. 2, 2004), https://www.bloomberg.com/news/articles/2004-09-02/founders-family-friends-and-fools.

10. Investor Guide: Types of Investors, Fundable (2014), https://www.fundable.com/learn/resources/guides/investor-guide/types-of-investors.

11. Go, supra note 8.

12. Mary Ann Azevedo, Pre-Seed Venture Aims to Help Startups Do More with Less, Crunchbase News (Nov. 17, 2017), https://news.crunchbase.com/news/pre-seed-venture-aims-help-startups-less.

13. Id.

14. Uber Technologies, Inc., Patent Buddy (Mar. 20, 2018), http://www.patentbuddy.com/Company/Profile/UBER-TECHNOLOGIES-INC./1957650.

15. Audrey Ogurchak, Uber IP: A Primer on the Patents, Trademarks and Copyrights Owned by Uber, IPWatchdog (July 23, 2016), http://www.ipwatchdog.com/2016/07/23/uber-ip-patents-trademarks-copyrights/id=71167.

16. Patent Assignment Search, USPTO, https://assignment.uspto.gov (last visited June 14, 2018) (in “Look up by” select “Assignee name”; then enter “Airbnb” or “Pinterest” in search field).

17. Shoshanna Delventhal, Series A, B, C Funding: How It Works, Investopedia (Dec. 29, 2017), https://www.investopedia.com/articles/personal-finance/102015/series-b-c-funding-what-it-all-means-and-how-it-works.asp.

18. Brad Feld & Jason Mendelson, Venture Deals 165 (3d ed. 2016).

19. Delventhal, supra note 17.

20. Id.

21. Feld & Mendelson, supra note 18, at 165.

22. Id. at 9.

23. Glassdoor’s intellectual property includes trademarks, domains, and copyrights, but not U.S. utility patents.

24. Glassdoor Company Profile, PitchBook (2018), https://pitchbook.com/profiles/company/51578-20.

25. Alex Barinka & Alistair Barr, Jobs Website Glassdoor Interviews Banks for 2018 IPO, Bloomberg (Feb. 26, 2018), https://www.bloomberg.com/news/articles/2018-02-26/jobs-website-glassdoor-is-said-to-interview-banks-for-2018-ipo.

26. Rand Brenner, 3 Big Benefits of Using an IP Holding Company, Licensing Consulting Group (Dec. 20, 2016), http://licensingconsultinggroup.com/3-big-benefits-of-using-an-ip-holding-company.

27. See id.

28. Ryan Law, The Startup Funding Bible: How to Raise Money like a Unicorn, Cobloom Blog (Jan. 4, 2017), https://www.cobloom.com/blog/startup-funding.

29. Amar Bhide, Bootstrap Finance: The Art of Start-Ups, Harv. Bus. Rev., Nov.–Dec. 1992, at 110.

30. Dana Olsen, A Record-Setting Year: 2017 VC Activity in 3 Charts, PitchBook (Dec. 15, 2017), https://pitchbook.com/news/articles/a-record-setting-year-2017-vc-activity-in-3-charts.

31. Ryan Smith, Why Every Startup Should Bootstrap, Harv. Bus. Rev. (Mar. 2, 2016), https://hbr.org/2016/03/why-every-startup-should-bootstrap.

32. Bhide, supra note 29, at 110.

33. Jason Lemkin, Bootstrapping in SaaS? It Does Work. But Add 4 Years to the Timeline, SaaStr (July 19, 2016), https://www.saastr.com/bootstrapping-in-saas-it-does-work-but-add-4-years-to-the-timeline.

34. Deb McAlister-Holland, 5 Easy Ways to Get Sued over Online Content & Social Media, Business 2 Community (Aug. 10, 2014), https://www.business2community.com/social-media/5-easy-ways-get-sued-online-content-social-media-0969797.

35. Ajay A. Jagtiani, Intellectual Property Litigation Financing, Miles & Stockbridge Intell. Prop. Blog (July 10, 2017), http://www.milesstockbridge.com/intellectualpropertyblog/posts/intellectual-property-litigation-financing.

36. One funder, Bentham IMF, funds only about 5 percent of the cases reviewed. Investors Take Notice of Litigation Funders’ Expertise and Successes, Driving Interest in the Asset Class, Bentham IMF Blog (Dec. 20, 2017), https://www.benthamimf.com/blog/blog-full-post/bentham-imf-blog/2017/12/20/investors-take-notice-of-litigation-funders-expertise-and-successes-driving-interest-in-the-asset-class.