The value of an early stage company may often lie in its intellectual property. The founders may have created a truly unique product which has a tremendous market potential. Or that is at least what the founders are thinking, right?
The question of whether the startup will eventually succeed is everyone’s guess, but the importance of intellectual property has become a widely acknowledged fact. Because of this many founders believe they will do better during the next financing round if they can evidence some serious IP activity. A nice IP portfolio is most certainly an asset, but what actually constitutes a “nice IP portfolio” is a question that is too often overlooked when making investment decisions.
Indeed, the fact that the startup has several pending patent applications or registered trademarks does not mean they are of good quality – meaning they will hold up in court or persuade the alleged infringer to take a license deal if push comes to shove. Similarly, if the IP protection activities are not in synch with the company’s strategy, it is questionable how valuable the IP of the company is.
For the above reasons, my pro tip number one to investors would be to dig deeper when it comes to IP matters. In other words, a good investor should not only verify that the company owns the IP it claims to own and has not assigned or licensed it under unfavourable terms (both of which are of course very crucial questions), but that that the IPRs and other legal mechanisms of protecting the intangible assets are of good quality.
This requires understanding not only the basics of different forms of IPRs, but also how they can support and improve the company’s business. If the patent does not actually cover the product sold or covers only an insignificant or an easily circumventable part of the product, everyone should understand that the value of the patent may not be very high. The same applies to trademarks not covering the brand in use, the goods/services offered under the brand or the countries of operation.
Another key thing to appreciate is the fact that IPRs confer their holder a right to prohibit others from misusing the protected IP. Indeed, they are not some subjective rights that will guarantee the IP holder’s exclusive right to use the subject matter of the IP. In fact, quite often an IP owner believes that by virtue of registering a trademark or a patent, it has an exclusive right to use the IP asset in question. However, the logic behind this thinking is not completely accurate. Instead, what a registered trademark, patent or other IPR means is that the owner is entitled to claim a third party not having his/her consent to cease using the protected IP and seek compensation for such unlawful use. This is called IP enforcement, and while it requires resources, it is nevertheless very important, since by failing to do so the company signals to others there is no risk of IP infringement claims – reducing thus the value of the company’s IPRs.
It also follows from the above that having a trademark protecting the brand of the company does not mean that the company could not be infringing third party trademarks through using its own brand. As a matter of fact, this can happen quite easily if the company enters new markets without making proper trademark clearance searches, but even in the case of EU trademarks that are registered by the EUIPO without examining prior conflicting rights in the EU. Therefore, clearing the IP rights of others is equally important to obtaining own IP rights.
To summarize, when making your next investment decision on a seemingly IP intensive startup, you will do well when in addition to the customary validity and ownership checks, you will also examine the quality of the IP possessed, the possibly unaddressed IP infringements, and the company’s freedom to operate with the brands and technology it is currently using.
For further information, please contact:
Henri Kaikkonen, Partner, Bird & Bird
henri.kaikkonen@twobirds.com
