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There are many, many reasons why it’s smart for an entrepreneur to learn about intellectual property law.  Here are ten of my favorites:

1.  To keep the intellectual property that you create for your new company free of ownership claims by your former employer

Watch out if you’re working on your new venture while employed by another company in the same industry.  Later claims by your former employer to your startup’s IP can land you in court and ruin your new company.

Knowing how to carve out and keep the intellectual property rights to what you create for your new company can be critical for your success.  It’s important to learn about trade secret law and what you can use from your prior jobs.

There are key steps you can take to narrow the net of what your former employer may claim, especially if you live in California.

2.  To increase the odds that you can use your company and product names without being stopped by another trademark owner

After picking names that you love for your business, products and services; incorporating your company; building a website; and working hard to promote your brand,

IT SUCKS TO HAVE A TRADEMARK OWNER CLAIM THAT YOU ARE INFRINGING!

Warning.  Just because the dot com domain is available, it doesn’t mean that you can freely use the name.

Just because the Secretary of State for one state allows you to use a business name, it doesn’t mean you can freely use the name nationally or on the Internet.

And no, your corporate lawyer probably didn’t check for conflicting trademarks.

Learning about trademark law and doing some basic groundwork before starting  your business can save you from big headaches and expenses down the road.

If you love your name, think about registering your mark so you can increase the odds of being able to use it.  Few people want to start over from scratch.

3.  To make sure your startup owns the intellectual property created by its founders, employees, vendors, and independent contractors

This is where many startups screw up if they don’t understand basic IP law.  Some of the legal rules about IP ownership are counterintuitive and complicated.

You should be aware that you may not own what you pay others to create for your new company if you don’t take precautions.

It seems so wrong but it’s true.

I’ve spent years doing intellectual property ownership clean up.  Some startups were able to make some basic changes and turn things around.  Others got burned — to the ground.

4.  To own the rights to your logo

Your logo is the symbol of your company.  Your hard work and promotion make it valuable and it’s usually worth the trouble to protect it.  If you don’t have a written copyright assignment by the person or company who designed it, you don’t own the copyright.  You need an assignment to register a copyright or trademark.

Professional design studios will assign the copyright to you without a hassle.  Beware of designers who won’t do a copyright assignment or balk at the suggestion.

5.  To own your company website

This is similar to number 4.  If you don’t have a written, signed copyright assignment for the design of your website, you don’t own the copyright to the site.  This may create problems in the future and it will prevent you from registering your website with the Copyright Office.

Bizarrely, if you don’t own the copyright and you change your site,  you may be guilty of copyright infringement.

If you already have a site, check on the footer to see if the design company is claiming the copyright.  Does their name appear after the copyright symbol?

Pragmatically, caring about IP ownership to your website depends in part on how much you spent for the design; the complexity of the design; your commitment level to the look of your site; your type of relationship with the designer; and how hard it would be to build a new site.

If it was expensive, design intensive, hard to replicate and you love it, pay attention to copyright ownership.

Further, to avoid infringement, make sure you have a license to use or own the copyright to every element on your website.

If your site is expensive, it’s important to be aware of what software was used as the foundation for your site and the related licenses.

6.  To minimize the chance of liability for IP infringement

Ignorance is not bliss.  It can get you sued.  And as some unfortunate software developers have learned, trade secret misappropriation can land you in jail.

7.  To get legal protection for intellectual property that is created for your startup

Different laws have different requirements for obtaining legal protection.  To get protection, you must follow the rules and take specific actions.  You don’t want to blow it and lose protection for your million dollar invention or product because you didn’t know what you needed to do.

8.  To understand open source licenses

Many technology companies incorporate open source software into their products.  What you can do with the new work you create that incorporates the open source code can vary dramatically.  Some open source licenses prevent you from selling your new product.  Beware unless you plan to give your product away for free.

9.  To protect your IP when you are doing a joint venture

When you work with another company or developer on a joint project or product, it is important to use more than a handshake.  It’s important to know what to do to keep the lines of IP ownership clear or you may end up with the default legal rules that create a mess you never intended.

Arguments because of an initial lack of clarity can ruin even the best friendships.

10.  To not scare off potential investors because the ownership of your startup’s intellectual property is a mess

The core assets of many technology startups are based on intellectual property.  I’ve done due diligence for venture capitalists and other types of investors and I’ve seen some horrible, dirty messes.  Don’t scare off potential investors because you haven’t taken the time to do what you need to do to have clear lines of intellectual property ownership.

Right now, you may not care about potential investors or buyers.  But if your startup is wildly successful, you may care when it’s too late to fix things.

Later posts will explain each category above in detail.  I will share valuable information about intellectual property law and some concrete steps that you can take to help your business succeed and increase the value of your work.

P.S.  You may want to subscribe to make sure you catch what you need to know most.

With thanks to www.iplawforstartups.com.   To see the original article please click here.

Remember, that the only dumb question is the one never asked. If you have any questions or comments, I look forward to them, please email or call me.

Cheers.

Allan

RESQBug.com Technical Services and PRAD Enterprise

“Managing Your Technology for Improved Workplace Performance”

c: 416.464.1508

e: allan@resqbug.com

t: http://twitter.com/resqbug

Visit us on the Web at http://www.resqbug.com

This article is for information purposes only.  It is recommended that individuals consult with an IT professional before acting on any information contained in this article. The opinions stated are those of Allan Waddington and not a reflection of any company he currently works with or has in the past.

“If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.” -Red Adair

VCs have an unfair advantage when it comes to financings.  They simply have more experience doing deals.

A typical start-up company will do 2-4 venture capital financings before a successful exit (or, conversely, an ignomious ending).  A typical serial entreprenur may lead 2-3 companies in their career before calling it quits (or checking themselves in to an insane asylum).  Thus, the universe of financings that even the most experienced entrepreneurs get directly exposed to is typically 5-10 financings over a 15-20 year career.  In contrast, the typical venture capitalist, either individually or across their partnership, will do 5-10 financings in any given year.  Year in, year out,

Thus, VCs and entrepreneurs are not operating on an equal playing field when it comes to negotiating financings and interpreting the impact of the terms involved.

One area that has always struck me where this assymetrical relationship comes into sharp focus is when there’s a discussion around the price of the deal.  Entrepreneurs often mistakenly focus solely on the pre-money valuation while VCs look at multiple knobs in the negotiation to drive to a set of terms that, in total, they find acceptable.  And if they don’t focus on the pre-money, they focus on their ownership position after the financing, irrespecive of the amount of capital that was raised.

In my partnership, we’ve come up with a new term (I think it’s new – I don’t see it written or talked about much) called the “promote” to help communicate with entrepreneurs the real value behind a particular deal so get them to step back from concentrating only on the pre-money valuation or post-money ownership.

What is the promote?  First, let me take a step back and define a few terms.  In the world of VC-backed financings, there are multiple terms that impact the ultimate price of the deal.  The first, and most focused on, is something called the pre-money valuation. That is, what is the company worth prior to the money being invested? This pre-money valuation is own known in shorthand as “the pre” and you will hear entrepreneurs and VCs discussing other company finances using this term (“You were able to raise money at a $9 pre?  I had to struggle to get to $6 pre and I have a prototype and real customers!  Life isn’t fair.”)

But the pre-money isn’t the only term that defines price, the amount of capital raised and the post-money plays a part as well.  The post-money is the pre-money plus the invested capital.  That is, if a company raises $4 million at a pre-money valuation of $6 million, then the post-money is $10 million.  The investors who provided the $4 million own 40% of the company and the management team owns 60%.

Another term that impacts the price is the size of the option pool.  Most VCs invest in companies that need to hire additional management team members and sales and marketing and technical talent to build the business.  These new hires typically receive stock options, and the issuance of those stock options dilute the other investors.  In anticipation of those hiring needs, many VCs will require that an option pool with unallocated stock options be created prior to the money coming in, thereby forming a stock option budget for new hires that will not require further dilution after the investment.  In our $4 million invested in a $6 million pre-money valuation example above (known in VC-speak shorthand as “4 on 6”), if the VCs insist on an unallocated stock option pool of 20%, then the investors still own 40%, there is a 20% unallocated stock option pool at the discretion of the board, and a 40% stake is owned by the management team.  In other words, the existing management team/founders have given up 20% points of their ownership in order to go towards future hires.

This relationship between option pool size and price isn’t always understood by entrepreneurs, but is well-understood by VCs.  I learned it the hard way in the first term sheet that I put forward to an entrepreneur.  I was competing with another firm.  We put forward a “6 on 7” deal with a 20% option pool.  In other words, we would invest (alongside another VC) $6 million at a $7 million pre-money valuation to own 46% of the company.  The founders would own 34% and we would set aside a stock option pool of 20% for future hires.  One of my competitors put forward a “6 on 9” deal, in other words $6 million invested at a $9 million pre-money valuation to own 40% of the company.  But my competitor inserted a larger option pool than I did – 30% – so the founders would only receive 30% of the company as compared to my deal that gave them 34%.  The entrepreneur chose the competing deal.  When I asked why he looked me in the eye and said, “Jeff – their price was better.  My company is worth more than $7 million”.

At the time, I wasn’t facile enough with the nuances myself to argue against his faulty logic.  That’s why we instituted a policy at Flybridge to talk about the “promote” for the founding team more than the “pre”.  The “promote”, as we have called it, is the founding team’s ownership percentage multiplied by the post-money valuation.  It represents the $ value in the ownership that the founding team is carrying forward after the financing is done.

In my example of the “6 on 7” deal with the 20% option pool, the founding team owns 34% of a company with a $13 million post-money valuation.  In other words, they have a $4.4 million “promote” in exchange for their founding contributions.  Note that in the “6 on 9” deal, the founding team had a nearly identical promote:  30% of a $15 million post-money valuation, or $4.5 million.  In other words, my offer wasn’t different than the competing offer, it just had a smaller pre and a smaller option pool.

Entrepreneurs negotiating with VCs should spend time making sure they understand all of the aspects of the deal, but particularly the elements of price – the pre-money, the post-money, the option pool – and do the simple math to calculate the “promote”.  There are many other elements of the deal that affect price (participation, dividends) and control (board composition, protective provisions), but make sure you think hard about the value you’re carrying forward, not just the price tag you think the VC is giving your company in the “pre”.

With thanks to  Seeing Both Sides.   To see the original article please click here.

Remember, that the only dumb question is the one never asked. If you have any questions or comments, I look forward to them, please email or call me.

Cheers.

Allan

RESQBug.com Technical Services and PRAD Enterprise

“Managing Your Technology for Improved Workplace Performance”

c: 416.464.1508

e: allan@resqbug.com

t: http://twitter.com/resqbug

Download our toolbar at http://pradenterprise.LoyaltyToolbar.com

Visit us on the Web at http://www.resqbug.com

This article is for information purposes only.  It is recommended that individuals consult with an IT professional before acting on any information contained in this article. The opinions stated are those of Allan Waddington and not a reflection of any company he currently works with or has in the past.