Why tech startups have got to protect their intellectual property

Intellectual property (IP) invariably will be a tech startup's most valuable asset. As such, it is important that a startup takes proactive legal steps at the outset to protect its IP from theft/infringement, as well as from excessive taxation that can limit the growth and future profitability.

Trademarks/tradenames, software/copyrights and patents are of central importance to a tech company, and the following are key protection considerations with respect to each:

Trademarks: As name recognition is extremely valuable, in addition to registering a corporate name, a startup should also be mindful of trademark issues associated with any names, phrases, symbols, or designs that identity its products or services. All of these items are forms of IP which have the potential to create a tremendous amount of value for a tech startup.

Consequently, to ensure that a startup will have exclusive use of a trademark, a startup should carefully consider, with the aid of competent advisors, when is the right time to file a federal trademark application and similar international trademark protections. On the other hand it is important to make sure that the marks you are using do not infringe upon another's mark – nothing like a suit to squelch a financing or offering!

Copyrights: Copyrights protect original works of authorship, such as literary and musical works, as well as computer software programs. With regard to software, a copyright can protect source code, object code, and user interfaces. An original work is under copyright protection the moment it is created. Nonetheless, a tech startup should consider registering its original works, such as software, because registration will act as a public recording of the copyright facts, creating a strong presumption in a lawsuit that the startup is entitled to copyright protection.

On the other hand, registration of original works of authorship has potential downsides, namely, just that, public disclosure. For instance, publication of source code, should it be registered in complete form, may allow a startup’s competitor to develop an alternative code which reduces the profitability of the startup's original code. Thus, experienced advisors should be consulted to ensure that public disclosure of information will not adversely affect a startup’s business objectives.

In terms of process, copyright registrations are processed through the US Copyright Office, and require a certified application, filing fee, and deposit of the material receiving copyright protection, such as a copy of software code. A copyright is effective the date the US Copyright Office receives all of the required application material.  

Patents: A patent legally allows a startup to exclude others from making, using, selling, or importing an invention. However, a patent does not grant a startup any right to make an invention; for example, an unrelated business may own a different patent that may prohibit a startup from utilizing their patented invention in a production process. Consequently, a startup should consult with an advisor to ensure that the invention can be used in the intended fashion.

Startups also should consult with an advisor during the patent application process. A startup can submit a "provisional application" which establishes an early filing date, followed by a submission of a non-provisional patent application within one year. The advantage of filing a provisional application is that a startup has put the public on notice sooner, rather than later, that it is claiming the patent rights to an invention. The product can be marked after filing of the provisional with "patent pending."

But the risk associated with filing a provisional application is that quality and precision may be compromised for the sake of an early filing date, resulting in a poorly drafted patent, one that may not be enforceable because of errors, vagueness or other insufficiencies. A poorly drafted patent application may needlessly expose valuable invention information to the general public, possibly leading to reverse engineering by competitors in the same market. Thus, it’s essential that a startup consult with an advisor to develop a strategy for when and how to protect an invention, weighing the risks and benefits associated with different options.

A startup should also consider how to mitigate the tax impact of exploiting their IP, both in the US and abroad. Though it may seem premature for a startup to think about international tax planning, the reality is that if a technology startup is successful in the US, it will likely, if not certainly, reap similar results internationally as well. Thus, all technology companies should assume that, if they are successful, they will become global in scale. Therefore, careful consideration of where to hold IP rights must be made. The best time to do this is before IP becomes highly valuable, as international corporate structuring with valuable IP can come at a staggering tax cost.

In conclusion, to ensure appropriate IP protection, startups should proactively work with advisors during the early stages of development in order to protect their most valuable assets.

Based in the Denver/Boulder area, Jill Kelley is Special Counsel in Withers Bergman's Corporate Tax group. Mitchell Kops is Withers Bergman's Global Head of Corporate Tax.