Having an IP strategy for spinouts (and why just protecting IP rights is not enough)

All forms of intellectual property (IP), including patents, trademarks, designs and other forms (IP assets) are crucial to the success of spinouts. IP assets are important differentiators for a business and key drivers for investment. The legal means to prevent and deter others from exploiting the technology or brand of a spinout will help protect the business and give investors comfort that it will retain value and generate a return.

To achieve these aims the business would be wise to have an effective IP strategy. Investors often consider the IP strategy as important as the IP when deciding whether to invest in a tech-based business. For example, has consideration been given to:

• What process ensures the spinout owns or has a durable licence to use (for example from the university if it retains the IP developed by the founders) its technology?
• Is the IP strategy aligned with the commercial, business and investment strategy?
• How expensive is it to maintain and when will the costs of doing so become payable?
• Will the IP protection maximise the business’ chances of future economic growth?

Demonstrating the business has thought about issues such as these by having a carefully considered, tailor-made IP strategy is a valuable part of the investment process – especially for those businesses where significant value comes from their IP.

IP assets can increase the value of a business by far more than its tangible assets and can be leveraged to raise money. However, this is only possible if protected and maintained pursuant to an effective IP strategy – subsequently streamlining the investor due diligence. To secure funding, businesses targeting investment from VCs and private equity firms must ensure their IP assets are in good order from the outset.

Key issues to consider when formulating an IP strategy include:

• Patents

Patents are commonly associated with tech companies; they provide a state-approved monopoly over the technology described. However, they are expensive to obtain and maintain, and a young business needs guidance on where and when to spend their money.

Further, using a patent to stop others from using your technology can be expensive. Access to litigation funding might be key. Patents can also protect the business against other patentees by enabling cross-licensing deals and may provide valuable income by licensing rights to others who are better placed to exploit them.

• Confidential Information and know-how

Rights of confidence in information and know-how can be an effective asset for a spinout. There are no costs to protect; all you have to do is keep it out of the public domain. The value is not only in specific information such as a formula or algorithm, but also in more prosaic processes – like methods of operation which can represent clear blue water from competitors.

A spinout needs to protect such information with appropriate technical and organisational measures, including robust NDAs; developing trust in your team; restricting universities from using or publishing results (at least until patented); and enforceable confidentiality obligations within employment and consultant contracts.

• Software

Software provides the cogs which turn the engine of many tech businesses. The principal IP rights protecting software are copyright and rights of confidence – for example in the source code, the structure of the programming and the individual algorithms and processes, which together form the applications.

To obtain investment, a business must own or have unfettered rights to use the software involved. We often find that a business does not own the copyright in the software it thinks it owns, typically because it was written by a contractor or research student or, potentially worse, is open source.

• Data and databases

In this data-driven world, databases are an increasingly important asset for tech businesses to develop, mine and allow others to mine. Planning is needed to ensure the business can protect and use the data (especially personal data). This area of law is developing fast; recent cases have recognised cryptocoins and domain names – both essentially forms of data – as being property.

Relevant IP rights include patents for example for database management systems, database rights (Brexit has somewhat confused the position on these), copyrights, rights of confidence and contractual rights. This area is complicated by statutory interventions protecting personal data, and specific rights for particular data, such as clinical trial data.

• Brand

The main protection for a business’ brand and reputation are trademark rights, registered and unregistered, and copyright in logos – the latter is often forgotten. These rights are very long lasting – another valuable feature for investors.  A brand-development strategy is key to protect the business as it develops. Searches will ensure the preferred brands can be used and registered in respect of acceptably broad descriptions of products and services (to cover product development) and in the right territories. It is also necessary to develop filing strategies to keep costs at a level a young business can afford.