MyFondia VirtualLawyer
June 9, 2016

Ten rules of thumb on intellectual property rights for early- and growth-stage companies

An increasingly important part of the wealth of young and growing companies is something else than tangible, material assets. Compared to such traditional material, these so-called intangible – that is, immaterial – assets such as software, mobile games or recipe development in the food industry offer an opportunity for business scalability. This, in turn, allows companies a quick and profitable growth. These kinds of companies are often aiming for an exit and require equity funding from external investors to accelerate their growth. At the same time, fast-growing companies are also attractive targets for buyers and investors, and frequently end up as purchase and investment targets because of this.

Informed buyers or investors want to make sure that the target company’s competitive advantage is protected to a sufficient extent by intellectual property rights (IPRs). What should the target company take care of, within the limits of available resources, in order to avoid so-called deal killers in the due diligence inspection commissioned by the buyer or investor? Below are ten rules of thumb on IPRs that help target companies avoid the biggest pitfalls:

  1. Identify early and use patents and other IPRs to protect the most important assets in terms of the company's competitive advantage, and ensure their registration in key target markets.
  2. Identify and use trademarks to protect the company's main brands and brand names, and ensure their registration in key target markets.
  3. Reserve domains and social media accounts that are most important to the company, so that the digitalisation of the company's products or services can be secured through web addresses and social media channels that support digital marketing.
  4. Try to find out to a reasonable extent that the company’s products and services do not infringe the patents of third parties or other IPRs (the so-called Freedom to Operate).
  5. Make sure that written contracts, in which it is agreed that all IPRs related to the company’s business are transferred to the company, are in place with the company's employees. According to existing legislation, the rights to inventions and computer software that were developed during employment are automatically transferred to the company. However, this does not apply to other IPRs.
  6. Make sure that written contracts, in which it is agreed that all IPRs related to the company’s business are transferred to the company, are in place with the company's shareholders and consultants.
  7. Make sure that written contracts, in which it is agreed that all results of collaborations or subcontracts and related IPRs are transferred to the company, are in place with the company’s main research and development partners and sub-contractors.
  8. Make sure that the company's sales contracts only grant limited access to the company’s IPRs and that under no circumstances is the ownership of the IPRs transferred in the sales contracts (unless it is a business deal).
  9. Use non-disclosure agreements to strengthen the company’s IPRs protection, as typically at least part of the company’s immaterial assets is know-how or something else, which cannot be protected with registered industrial property rights.
  10. Try to monitor to a reasonable extent that the company’s IPRs are not infringed and react immediately when infringements are detected.

It is true that the protection of IPRs requires investments from the target company and many early-stage companies, especially in the absence of external investors’ involvement, have limited resources for this purpose. However, by investing in good contract templates and general terms and conditions, it is possible to tackle these objectives at a reasonable cost as well as bring both efficiency and security to operations.

With exit situations in mind, the representatives of the target company should be prepared for the fact that written seller’s insurance needs to be given in the title deed or investment documents for the above types of things as a condition for the implementation of the sale or investment. Providing personal insurance is much more natural when its subject has been systematically taken care of from the beginning.