IP for Tech CEOs: Starting Out
Anyone who’s a leader in a tech SME knows and understands the importance of Intellectual Property (IP) for their business. However, relatively few understand what IP is and how best to use it to gain investment or an exit.
Many of our clients have outlined the need for greater clarity here as, no matter how many times a patent attorney tells them what a patent is, or a trademark attorney tells them what a trademark is, the practicalities of managing IP in their businesses doesn’t filter through.
For this blog post, we will explore how to take the major steps in developing an IP strategy, how different IP rights relate to your business and how you can use them effectively, providing a reference tool for future use.
Why is it important for growing tech companies to understand Intellectual Property?
IP is like a treasure chest for tech companies, holding all their valuable ideas and innovations. Let’s break down what IP is and why it’s crucial to manage it well, especially for tech CEOs looking to grow or sell their businesses.
Let’s imagine a tech company, InnerCore Robotics Ltd. They are preparing for acquisition and walking through all of the different components they must prepare and put in place.
InnerCore invent and develop specialist prosthetics – microprocessor-controlled knee joints and specialist foot and ankle joints. These prosthetics have an extra software element, allowing much more fluidity of movement for users.
InnerCore have been steadily growing for five years, transitioning from a start-up to a more systemised and formal business structure. They have a significant amount of money on board, with a team of 9. They’ve grown to a point that they’re now considering whether they want to hire a part-time CFO and possibly a CEO.
InnerCore is seeking further investment with a longer-term view to prepare the business for acquisition by one of a few more prominent players in the sector.
To this end, they have determined that IP will be crucial to the business and its position for acquisition. They’ve filed a patent or two and have a trademark in place, but they need to look at and understand IP more seriously, so it becomes an essential element of their sale, closely aligned with their commercial goal of achieving an exit.
Sound management of IP is an important part of InnerCore gaining investment or achieving acquisition. Any investor or acquirer will want to see IP well-handled so they can de-risk their investment, particularly if it is a strategic acquisition to bring new technology or expertise in-house. They will want to know, for example, that InnerCore’s key innovations are well protected, and that the IP protection fits with the commercial plan. They will also want to be sure that agreements and contracts are sound and ensure the IP is owned by InnerCore. On top of that, they’d like some comfort that InnerCore is not infringing anyone else’s IP as that would present an obvious risk to them.
So let’s take a look at what good IP strategy looks like for an early-stage or scale-up business like InnerCore.
How should InnerCore be developing an IP strategy?
Broadly speaking, IP strategy can be split into three areas: IP protection; IP risk; and IP commercialisation. In reality, most early-stage and scale-up businesses are looking to commercialise their IP by using it to achieve investment or an exit, rather than pursuing a licensing, for example. As a result, IP commercialisation can be largely ignored until a business is pretty well developed and any business such as InnerCore should be considering two points as part of their IP strategy:
- IP protection
- IP risk
IP protection is about ensuring that the IP generated within InnerCore is protected and that competitors are prevented from using it without InnerCore’s say so. More specifically, it’s about making sure that not just any IP but commercially valuable IP that is generated within InnerCore is protected. Typically, this will involve the use of a number of IP rights that we look at below.
At a high level, IP protection involves two stages:
- Innovation harvesting – a session with the Research & Development team to walk through InnerCore’s technology and gather together all the innovative ideas. There will be many ideas at this point.
- Commercial assessment – objectively assessing the commercial value of each innovation to determine what should be actively protected. This can easily be done using a scorecard, an example of which is given below.
|Innovation||How clever is it against other solutions? (/5)||How difficult to design around? (/5)||Revenue potential? (/5)||Linked to the company’s strategic direction? (/5)||Total (/20)|
|Low friction joint allowing use of smaller motors||2||1||4||5||12|
|Light weight limb structure||5||4||5||5||19|
The table above includes only two innovations, but it is likely that the innovation harvesting would identify many more innovations within InnerCore – 10-15 is typical. The scorecard can be adapted to suit a company’s needs, but the columns shown in the example are commonly used. By scoring each innovation using each of the criteria, the highest value innovations should result in the highest totals. What InnerCore is trying to get at is what are the most innovative ideas they have in their business and which of those are the most commercially valuable.
Based on budget, InnerCore can focus its financial resources on the top-scoring innovations.
How should InnerCore protect their most valuable innovations?
Now they’ve decided where to target their protection, InnerCore needs to decide on the appropriate IP rights. Three major ones used in any technology business are considered below:
Patents – generally, these will relate to InnerCore’s R&D innovations – protecting aspects of InnerCore’s technical inventions and most importantly those that are commercially valuable and visible to the public and their competitors. This might be a new type of joint, a more robust limb design or a more dextrous finger implementation. These things would be visible to an end user or competitor and, if they are new and clever, are suitable for patent protection.
Trademarks – InnerCore will almost certainly be well advised to protect their business name and logo by registering trademarks if they haven’t already. However, because InnerCore are not really a B-to-C business, trademarks will be less critical generally, and InnerCore would be less likely to use them extensively than, say, a fashion brand or consumer electronics company.
Having said that, in the health sector, brand names can have significant weight so InnerCore might want to protect the names of each of their product lines that are associated with their technical innovations. For example, patents can protect the technology itself and a trademark can protect the brand name so that the consumer associates the name with the technical advancement.
Trade Secrets and confidential information – In a business such as InnerCore’s, trade secrets will mostly relate to software and algorithms that they do not want to put in the public domain. For other businesses, trade secrets might relate to chemical formulae, for example.
Protecting these types of things with a patent might be useful, but it must be weighed against the risks associated with the fact that the patent application will be published, and the innovation revealed to competitors. It is a sound strategy for InnerCore to determine what elements of an innovation they can and want to keep secret, and which elements will be visible to competitors anyway. If a part of an innovation is visible then there is little harm in including it in a patent application, but if it cannot be reverse engineered then it’s worth considering trade secrets.
IP risk can be split into two main types:
- Internal IP risk – ensuring that employment contracts and agreements are watertight, so that IP doesn’t leak away from InnerCore’s business and into the public domain. This will include Non-Disclosure Agreements (NDAs), employment contracts and collaboration agreements such as joint ventures.
- External risk – this relates to other people’s (e.g., competitor’s) IP and making sure that InnerCore is not infringing any of it.
To manage internal IP risks, InnerCore will need to get advice from an IP expert, preferably an IP solicitor. They will advise InnerCore on the correct terms to put in their contracts and agreements to make sure that they retain proper ownership of all their IP.
Managing external IP risks usually means conducting some freedom to operate analysis, which will usually include the following steps:
- Undertaking a search for existing IP rights – a search company will do this.
- Assessing whether InnerCore’s product might infringe any of those existing IP rights.
- Determining any risks so that good commercial decisions can be made.
It can be common for freedom to operate work to carry a high price with patent attorneys charging upwards of £15,000. Tech start-ups and scale-ups should be wary of this and make sure that the work being done on freedom to operate is aligned with what they need to achieve and also the stage of their product development.
At Matter IP, we offer an early-stage freedom to operate product that provides high-level guidance delivered in a meeting or on a call for around a third of the price of more detailed work offered by other firms. Often, for SMEs this is all that’s required.
Sound IP management for the early-stage tech business
Any tech business taking the relatively simple steps set out above will, without much doubt, set themselves apart from most of the competition for investment funds. Having a well thought out plan for their IP that helps tell the commercial story of their business will be a powerful tool when it comes to pitching. On top of that, it says a lot about the credibility of the leadership team and helps increase confidence.