Potential investors, acquirers and commercial partners, among others, will scrutinize a company's intellectual property to determine its value. For example, they will focus on whether a company actually owns the intellectual property it claims to own and whether the intellectual property can serve as a foothold against larger, established companies in its sector or other competing startups. As a result, from inception start-ups should focus on establishing a clear "chain of ownership" of their intellectual property and be thoughtful about the means by which they protect their intellectual property.
Protecting Your Start-Up.
Start-ups, particularly those in the technology or life science sectors, rely heavily on the ownership and protection of intellectual property to establish and preserve their value.
Overview
Best Practices to Protect Your Start-Up Business
- Structure your business: Making sure to choose the right structure for your business is key for multiple reasons, from organization to future development. You will also need to apply for a tax ID number and the proper permits and licenses.
- Get insurance: Business owners often assume that they will never need insurance. But in a worst case scenario, you will be thankful you have it. You should consider taking out commercial liability insurance to protect your company in the instance that you are being sued by a third-party, such as a customer.
- Establish contracts: When you eventually do expand your workforce, you must fully abide by employment rules and provide a safe work environment for your employees.
- Secure with cybersecurity: It’s not just your physical property you need to protect. Making sure that all your data is secure with comprehensive cybersecurity technology and measures is important when handling customer and colleague data.
- Pay your taxes: It is important to make sure that you pay all taxes to keep your business trading legally.
- Protect your intellectual property: Whether your business is in its early stages of growth or you are growing your brand, it is important to make sure you trademark or copyright your assets, like logos and branding.
Common Intellectual Property Problems
One of the most highly scrutinized aspects of a technology company is its intellectual property; and whether the company truly "owns" everything it needs to operate its business and deliver its products and services.
As part of most legal transactions, whether involving a financing, an acquisition, asserting IP against a third party, or even a collaboration with another company, confirmation that no third parties can step in and claim ownership of the company’s core assets is crucial.
Typically, each person that joins a start-up brings certain specialized skills and knowledge that makes them valuable to the new company. However, it is precisely this fact – as it is often the case that these skills were acquired and honed while working elsewhere – that can lead to questions surrounding ownership of IP.
It is important to consider who besides the company may try to assert ownership of intellectual property purported to be owned by the company.
The Individual
Initially, the individual employee or consultant may claim ownership if they conceived of the idea or wrote code on their own time or under an ambiguous employment or consulting agreement. This is especially true if the individual is hired as a contractor, as opposed to an employee. Similarly, any transfer of IP (e.g., from a founder into the company or a previous entity) must be evidenced by a writing and supported by some form of consideration, typically an ownership stake in the company. It is imperative that every individual, including founders, employees and consultants, execute some form of IP assignment agreement.
Previous Employers
Beyond the individual, a previous employer may stake a claim in the IP. For example, if a programmer working on the Exchange Server product for Microsoft has an idea for a new email protocol and interface, and, in his spare time develops a prototype that eventually becomes the basis for a start-up, Microsoft may claim that the IP is theirs based on the scope of the programmer’s employment and other facts. In such cases, it is critical that new employees, especially those bringing technical expertise to the company, provide copies of prior employer agreements and list any “excluded IP” that may not be transferrable to the new company.
Universities
In some cases, IP may be created as a result of research done at a university. Most universities have a policy stating that IP created in furtherance of a graduate degree or that was funded by a university grant is considered property of the university. The degree to which a university will sell or license that IP to a start-up varies from school to school, but it is important to understand that in order to effectively commercialize and possibly maintain the proprietary nature of the IP, the company may need to obtain ownership of or license rights to the IP.
Government
Valuable IP may result from research funded by the U.S. or a foreign government. In many cases, the ownership of the IP will be dictated by the terms of the research grant, in which the IP is owned by the individual (or entity), but subject to certain intervening rights of the government to the IP.
Conclusion
In each of these cases, it is important to (i) identify any IP that a new employee or contractor may be bringing to the company, (ii) determine the proper ownership of the IP, (iii) document the ownership, (iv) obtain any rights from third parties that are necessary for the operation of the company, and (v) have each employee and contractor execute a proper IP assignment form as a condition of employment or engagement.
Patents and Trade Secrets
Newly formed start-ups, particularly in the technology sector, rely heavily on the protection of intellectual property (IP) to establish a foothold in their industry and to provide leverage with larger, established companies. The two most common ways a company protects its IP are patents and trade secrets.
Choose One or the Other Carefully
Patents and trade secrets are often referred to as "two sides of the same coin" in that, for any specific IP, you have to choose one or the other. However, the decision on which form to use for particular IP is critical, and making the wrong choice can be devastating.
Are Patents Good or Bad?
Patents have both their upsides and downsides. A patent is a creation of statute – based in the Constitution – that grants a limited monopoly to the inventor to exclude others from "practicing the invention." The monopoly is considered limited because it expires 20 years from the earliest claimed filing date of the patent.
This monopoly comes at a cost. In order to enjoy exclusivity, one must also teach the invention to the world. So, while a patent holder may be able to exploit their invention for many years, others can read the patent, understand how the invention works and, as is often the case, come up with improvements on (or workarounds for) the patented invention and obtain patents themselves.
Once issued, a patent can be a very strong deterrent to entering a particular market or incorporating key features in a product, and the invention cannot be used without a license from the patent owner. This is true even for "innocent" infringers – as not knowing about a patent is not a defense to infringement.
The inventor who chooses to apply for a patent essentially is making the decision to sacrifice secrecy and potential long-term exclusivity for a short-term guarantee of exclusivity.
Trade Secrets
Unlike patents, trade secrets prohibit unauthorized access to the protected IP. However, trade secrets do not completely prohibit actual use of the IP. Reverse engineering, innocent use and sometimes even a lucky stroke of genius are all complete defenses to misappropriation of a trade secret. This places a heavy burden on the owner of the trade secret to implement proper access and use restrictions to establish and maintain trade secret status for the particular IP.
Disclosure is not strictly forbidden – companies often share trade secrets under a form of confidentiality agreement. But any disclosure comes with risks, especially as employees and consultants move in and out of an organization. Once the trade secret has been revealed to the world, it is "out of the bag" and no longer is considered secret.
As a general rule, any technology that is "customer facing" and can be easily understood without access to anything more than a commercially available product is a good candidate for a patent, whereas back-office algorithms and many methods of manufacture are typically protected via trade secret.
Example: Patent or Trade Secret?
The challenge is to decide, for particular IP, which form of protection is most appropriate and aligns with the company's goals. Consider a company that has invented a new system for compressing and storing data, consisting of two functional modules:
Module 1 reads and writes data in a novel manner
Module 2 uses a new compression routine to reduce the size of the data when stored
Because the read/write process may be something that needs to be disclosed to partners or customers and is likely easily reverse engineered, trade secret protection may not be available, and a patent may be the best solution.
However, the compression routine – something that happens solely within a "black box," is not disclosed to anyone and cannot be easily reverse engineered – is a good candidate for trade secret protection.
The bottom line is more often than not, understanding the use and business strategy for a particular piece of IP will lead you to the correct conclusion.
Trademark FAQs
Newly formed start-ups, particularly in the technology sector, rely heavily on the protection of intellectual property (IP) to establish a foothold in their industry.
What is a trademark?
A trademark can be any combination of letters, numbers, designs and/or other distinctive elements used to identify the source of goods and services. Trademarks can be non-verbal and even non-visual — the shapes of products or their containers, colors, and even sounds (such as NBC's three chimes) can all serve as trademarks. "Trade dress," such as the thematic decor, menus and color scheme of a restaurant, can also be protected.
What is a service mark and how is it different from a trademark?
"Service mark" is simply the term used for a trademark when applied to services rather than to tangible products. The difference is largely semantic; the legal protections available for trademarks and service marks are essentially identical.
How can I establish my right to use a trademark?
In the United States, one establishes and accrues trademark rights simply by being the first person to use a mark, continuously, in commerce for particular goods or services. Under U.S. trademark law, rights to a mark arise from use of the mark, not registration. Once you begin using a trademark in commerce, you begin accruing common law rights to that mark which can increase over time. Federal registration is particularly valuable because it gives nationwide protection even in geographical areas where the mark is not currently being used; it also provides a federal forum for enforcement, and penalties against infringement not available in state courts.
Learn more about U.S. trademark laws and regulations: Visit the U.S. Patent and Trademark Office's website
Can any word be used as a trademark?
Yes and no. The essential function of a trademark is to identify the goods and services of one seller and distinguish them from those sold by all others. A mark may therefore not be entitled to protection if it is determined to be (i) merely descriptive of the goods or services to which it relates, or (ii) the generic term for such goods or services.
A mark is considered descriptive if it describes an ingredient, quality, characteristic, function, feature, purpose or use of the specified goods or services. Whether or not registration is obtained, marks which are relatively descriptive or generic are generally considered to be "weak" marks, which will be enforced, if at all, only within a narrow field.
Can I register my own name as a trademark?
As a general rule, a mark which is primarily merely a surname is not entitled to registration on the federal Principal Register. The purpose of this rule is to prevent one person from monopolizing his surname in commerce and preventing others who happen to have the same last name from competing in their own name in the same line of business. Surnames are eligible for registration on the Supplemental Register, and can subsequently become eligible for Principal registration once the owner can prove that as a result of extensive use as a trademark (for at least five years), the name has come to be recognized by the public exclusively as a trademark of the applicant.
What do trademark rights do for me?
A valid trademark is a form of intellectual property right that gives the owner the right to prevent others from subsequent use of a confusingly similar mark for goods or services that are closely related to the goods or services sold using the mark. These three critical elements are: priority, confusing similarity, and competitive proximity.
Priority: Priority of use generally controls the outcome in trademark disputes. Thus, even a prior unregistered user whose use predates both the first use date and application filing date of a federally registered mark will prevail over the federal registrant and generally retain the right to use the mark in the same geographic market area.
Confusing Similarity: Similarity of marks is evaluated on the basis of the overall impression conveyed by each mark. Marks do not have to be identical for trademark rights to be infringed, and variations between marks may or may not eliminate the likelihood of confusion depending on the extent to which the variation has a dominant effect on the overall impression.
Competitive Proximity: Goods and services that are unrelated can generally be sold under similar or even identical marks, but courts look to whether the products or services in question are sufficiently similar or related in function and market focus such that the likeness in the marks is likely to lead to customer confusion.
Do I have to be actually using the mark to get a registration?
In the United States, yes. However, federal law permits a trademark owner to begin the application process before the mark is in use, provided the applicant has a bona fide intention to use the mark in commerce, and that such use can be documented within a specified period after the application is allowed. Such an application is referred to as an "ITU" (intent to use) application. The ITU application process can be more lengthy and expensive, but it provides the advantage of getting "on the record" and establishing a federal priority claim at an earlier date.
Learn more about the intent-to-use application process: Visit the U.S. PTO's ITU page
How do I go about getting a federal trademark registration?
The federal trademark registration process breaks down as follows:
Trademark Search: Prior to filing any applications – and indeed before even making a final decision on a mark – we strongly recommend having a professional trademark search done to ensure that no one else is using or has registered the same or a confusingly similar mark. This is important because a trademark application includes a statement under oath by the applicant affirming that no one else is using the mark at the time of the application.
Preparing the Application: A U.S. trademark application requires the applicant to provide its name and address, nationality or state of organization, a description and drawing of the mark, a description of the goods and/or services the mark is used to identify, the date(s) when the mark was first used, and sample labels or other "specimens" showing how and where the mark is actually used.
Get started on your U.S. trademark application: Visit the U.S. PTO's trademarks page
Filing Fees: The filing fees charged by the PTO for a trademark application currently range from $275 to $375 per class of goods or services, depending on which application procedure is used. There are 45 classes covering virtually every conceivable product and service.
Examination by the PTO: Once a new application has been received by the PTO, it is placed in queue to be assigned to a trademark examining attorney and begin the examination process, which typically takes six to eight months. The examining attorney will review the application and either refuse registration or approve the mark for publication.
Approval, Publication and Registration: Once the mark is approved for publication, it will appear in the PTO's Official Gazette, after which anyone can (within 30 days) file a notice with the PTO if they object to the mark being registered. From beginning to end, the entire application process can take 18 months to two years.
How long do trademark registrations last?
Common law trademark rights will last as long as the mark is in use in commerce, and therefore can potentially be perpetual. The term of a U.S. federal registration is currently 10 years. Registrations are renewable for additional 10-year periods, provided the mark is still in use. Federal trademark law also provides that a federal registration will be cancelled six years after issuance unless the registrant files a sworn statement (called a "Section 8 Affidavit"), together with a specimen, affirming that the mark is still in use.
Learn more about keeping your registration alive: Visit the U.S. PTO's trademark maintenance page
What do ®, ™ and SM mean?
The ® symbol designates a federally registered trademark, and may only be used when the owner has a federal registration for that exact mark. A state registration does not permit use of the ® symbol; nor does a pending federal application.
The "TM" (for trademarks) and "SM" (for service marks) symbols denote common law trademark rights and their use is not governed by any federal statute. They merely announce to the world that one is claiming exclusive rights to this mark, irrespective of federal registration.
What are the benefits of federal vs. state trademark registrations?
A federal trademark registration provides presumptive evidence in court of your ownership of, and exclusive right to use, the trademark in question throughout the United States – even in parts of the United States where the mark is not yet in use. Federal trademark law also provides for awards of significant money damages for infringement of a registered mark.
The primary advantage of a state trademark registration (in most states) is that it can be obtained at low cost and in relatively short time. The state registration will also be listed in the various international trademark databases, and thus can often put potential rivals on earlier notice of your claim to own and use the mark.
What about foreign trademark registrations?
U.S. trademark rights are territorial – that is, they do not extend beyond the boundaries of the United States and the jurisdiction of its courts. For companies doing a significant amount of business overseas, it is recommended to register its trademarks in those countries where they have a physical presence or generate a significant amount of revenue.
The United States is a member of a multi-lateral trademark treaty known as the Madrid Protocol, which permits a U.S. applicant to secure protection for a mark in the dozens of other Madrid System member nations simply by filing one application here in the United States. Particularly for companies with large trademark portfolios and broad overseas operations, filing under the Madrid Protocol can help realize some significant cost advantages.
Learn more about the Madrid Protocol: Visit the U.S. PTO's overview page
Can I get a registration of my domain name with the PTO?
A mark composed of a domain name is registrable as a trademark or service mark, but only if it functions to identify the source of particular goods or services, rather than merely serving to locate a website. Examples of appropriate uses of a domain name for trademark purposes include the use of the domain name on the actual pages of a website offering services, and off-line use of the domain name on marketing or promotional materials for services.
It is also important to secure the domain names corresponding to your trademarks. Similar domain names can pose practical problems for people looking for you on the Internet, and, if found to be used as a trademark and not just an internet location, they also can dilute or weaken the distinctiveness and enforceability of your mark. We always advise clients to register and/or otherwise acquire the .com, .net and .org domain names corresponding to their important trademarks, including any variations in spelling, spacing, hyphenation, abbreviation, common typographical errors, etc.
Artificial Intelligence Tools: Risks and Best Practices
Artificial intelligence (AI) tools have rapidly become part of everyday business operations, offering meaningful productivity gains for tasks ranging from drafting communications to writing and reviewing code. However, the use of AI tools in a business context without appropriate safeguards in place can present significant legal and operational risks that start-ups must understand and actively manage. Failing to do so can jeopardize trade secrets, create IP ownership disputes, expose confidential data, and undermine the value of the Company’s core assets.
Risks of Using Free and Consumer-Grade AI Tools
Trade Secret Loss. Inputting proprietary information (code, financials, strategy) into a free AI tool may expose it to third parties or model training, permanently destroying trade secret protection. Voluntary disclosure cannot be undone.
Data Privacy & Regulatory Exposure. Submitting PII, PHI, or other regulated data to an unvetted AI platform may violate HIPAA, GDPR, CCPA, or contractual obligations. Many free tools do not offer the required data processing agreements.
Adverse IP Ownership Terms. Many AI tools claim licenses over submitted content or disclaim ownership of outputs. Without enterprise-grade contractual protections, IP ownership of AI-assisted work product may be uncertain, which can cause diligence issues during subsequent financing or acquisition due diligence.
Use of Company Data for Model Training. Free and consumer-grade AI tools frequently reserve the right to use submitted content to train or improve their models. This means confidential business information, internal documents, or proprietary processes entered into these tools may be incorporated into the AI’s future responses to other users. Companies should assume that any data submitted to a free AI tool may be retained and used for training purposes unless the provider's terms explicitly and contractually prohibit it.
Loss of Attorney-Client Privilege. Submitting privileged communications or legal advice to a third-party AI platform may constitute a waiver of attorney-client privilege. Privilege generally protects confidential communications between attorney and client, but that protection can be lost when the communication is voluntarily disclosed to a third party outside the privileged relationship.
AI Tools in Software Development
Copyright Gaps in AI-Generated Code. U.S. copyright law requires human authorship. Purely AI-generated code may not be protectable, leaving the Company unable to exclude competitors from copying it. Developers must actively direct, modify, and integrate AI output to establish sufficient human authorship.
Open Source Contamination. AI coding tools trained on public repositories may reproduce GPL or other copyleft-licensed code. Incorporating such code into a proprietary product can trigger an obligation to publicly release the Company’s own source code. AI-generated code should be reviewed for open source license issues before any product launch, fundraise, or acquisition.
Exposure of Proprietary Code & Training Risk. Submitting source code to an AI coding tool sends it to a third-party server where it may be retained and used to train the provider’s model. Only enterprise agreements that explicitly prohibit use of submitted code for model training and include adequate data security terms should be used.
Recommended Best Practices
We recommend companies adopt a written AI use policy before employees begin using AI tools in the course of their work. At a minimum, such a policy should address the following:
Approved Tools. Maintain a list of approved AI tools and require pre-approval before any new tool is used for company business. Approval should be conditioned on a review of the provider’s terms of service, privacy policy, and data handling practices.
Restrictions on Model Training. Before approving any AI tool for company use, confirm that the provider contractually commits not to use submitted data, prompts, or outputs to train or improve its models. This commitment should appear in the provider’s terms of service or in a separately negotiated data processing agreement. Tools that do not offer such a commitment should not be approved for use with any company data.
Prohibited Inputs. Expressly prohibit the input of trade secrets, confidential business information, source code, customer data, personally identifiable information, and any other sensitive company information into unapproved AI tools.
Code Review Requirements. Require human review and approval of all AI-generated code before it is incorporated into any company product or codebase.
Employee Training. Ensure that all employees and contractors are trained on the Company’s AI use policy and acknowledge in writing that they have read and will comply with it.