Top Legal Mistakes Entrepreneurs Make with IP

Error Number 1: Neglecting to Scout Out the Existing Competition.

A major blunder frequently committed by nascent businesses and aspiring entrepreneurs lies in the failure to thoroughly investigate the existence of competitors. This encompasses an in-depth search for pre-existing inventions, trademarks, patents, copyrights, and other intellectual properties that might bear resemblance. Identifying similar products, services, and concepts is paramount. Not only does it shape the startup's direction and its practicality within the market, but it also clarifies the ability to operate freely and whether the startup's inventions, marks, and products possess sufficient uniqueness to qualify for intellectual property protection by the U.S. Patent & Trademark Office. Ignoring a comprehensive professional investigation can lead to accusations of "willful" infringement, potentially resulting in punitive and triple damages if the startup's products are found to be infringing. For potentially patentable inventions, failing to secure a patent clearance opinion can also present a substantial hurdle in attracting capital. Securing a thorough search and opinion is surprisingly affordable, typically falling within the range of $500 to $1,000. By engaging a firm that comprehends the specific requirements of startups, entrepreneurs can often avert early challenges for their ventures by securing appropriate searches of marks and new inventions.

Error Number 2: Delaying the Necessary Actions.

Most entrepreneurs I speak with are usually taken aback when they discover that a patent application must be submitted within a year of the initial printed publication, disclosure, or offer for sale of the product. This one-year rule operates as an absolute restriction and admits no extension. The issue is that the most novel developments within a startup frequently surface during its infancy, or sometimes even prior to its formal establishment. Furthermore, the United States operates under a "first-to-file" system. Consequently, waiting too long to file a patent application may lead to complete loss of rights, irrespective of who invented first. Furthermore, numerous other countries impose no grace period. Thus, if your invention becomes public or is made available for sale, or exhibited at a trade show before a patent application is filed, then all patent rights outside the U.S. are automatically lost.

Error Number 3: Lack of a Strategic Approach.

Another commonplace and expensive blunder made by startups is to act without a clear and comprehensive strategy. Too often, startups rush into action, investing resources in the preparation of patent applications that are either excessively narrow in scope, poorly drafted, or fail to effectively deter competition. Failing to seek expert guidance before the application process can result in wasted fees on fruitless intellectual property protection. Occasionally, companies waste time and resources on patenting inventions that are actually unrelated to the core product or the most innovative invention. Not all technological advancements can, or should be patented, regardless of cleverness, uniqueness, or innovation. The primary goal of the patent ought to be to safeguard the business's revenue and market share, not to inflate the ego or provide recognition to the founder. Moreover, not every invention holds the potential to become the foundation of a profitable enterprise.

Error Number 4: Attempting Core Document Creation Through DIY Methods.

Breaking habits can be hard for experienced entrepreneurs, but a DIY approach can be as beneficial as it is damaging. However, wise entrepreneurs understand the areas where they can handle tasks without assistance and the tasks that truly demand professional support. Unfortunately, owing to their typical financial limitations, young companies often find it difficult to allocate crucial resources to expert legal, tax, and business guidance. Instead, they rely on online templates, forms, and the infamous LegalZoom, which offers pre-packaged legal solutions. The drawback is that preparing essential documents through DIY methods can prove a costly error to remedy. My experience involves working with numerous founders and entrepreneurs who depended on document preparation services. Unfortunately, they soon learned they'd need to spend two to three times the original sum to resolve the issues caused by the online service. Legal, tax, and business documents simply do not function like “choose your own adventure” games. Expecting the magic combination of checklists and radio buttons to produce documentation that effectively supports a new business's growth is unrealistic. Frequently, entrepreneurs believe they can assemble the basic core documents and subsequently seek professional help once they achieve traction and funding. By that juncture, though, it's often too late. Think of it as constructing a home that demands a solid foundation. It’s not a Lego-house, so you won’t be able to rip out and re-pour the basement foundation 5 years after building it — you’ll have to re-build your entire house.

Error Number 5: Issues with Title and Ownership.

Startups and entrepreneurs must also actively safeguard the chain of title for their inventions, and sidestep problems by understanding ownership details. In many cases, significant technology or inventions come into being long before the company officially exists. The so-called "Zuckerberg" problem serves as a cautionary example (Mark Zuckerberg never properly assigned his IP rights to the initial company he co-founded with Eduardo Saverin and later, due to a falling out, established a new company to which he assigned his IP rights.) Serious errors can arise when companies fail to appropriately assign intellectual property developed by the founders to the company. Angel investors or venture capital firms undertaking due diligence will rigorously scrutinize whether the company owns the preexisting technology. Failure to establish ownership can dissuade investors. Title issues can also surface with outsourced consultants, independent contractors, and developers, not to mention friends, colleagues, or casual acquaintances. Neglecting to obtain work-for-hire agreements and similar arrangements to ensure that the work created by outsiders is the property of the company can have disastrous repercussions, as everyone seeks to capitalize on the startup's success. Consequently, startups and entrepreneurs should make sure all intellectual property is properly assigned to the company upon its formation. This allows stock issuance in exchange for the assignment, neatly resolving any potential claims of ownership over the company’s intellectual property.

Error Number 6: Failure to Shield Trade Secrets.

Unlike copyrights, trademarks, and patents, there are no formal federal procedures for the protection of trade secrets. It is the responsibility of the startup to safeguard information considered valuable and confidential. Confidential information may encompass programs, techniques, methods, processes, client lists, pricing details, and non-public financial data, among others. Essentially, anything that could be leveraged to the company's detriment within the marketplace should be treated with utmost care and secrecy. In several fields and industries, the market is already crowded — the misuse of sensitive information about a company's margins, price lists, or customer lists can swiftly curtail the lifespan of a promising young startup. The solution rests with a robust non-disclosure agreement or similar confidentiality agreement. A professionally drafted document is the most secure and dependable path, because online templates are often poorly constructed, internally inconsistent, and sometimes, even contradictory.

Error Number 7: The Significance of the Right Name.

Successful startups and companies generally have catchy and memorable company names, product names, service names, and trademarks. Building brand recognition can take many years, think of companies who picked very abstract names (Google, Hulu, Moodle and others). On the other hand, selecting the right company name, logo, or trademark can succinctly convey the company's area, industry, and product—provided sufficient consideration and time are allocated to the selection process. A prominent error made by entrepreneurs is rushing through this phase. Discovering suitable slogans or names for products, services, or companies demands both time and creative effort. Often, this task is beyond the capabilities of a solitary individual. Creative ideas frequently arise through the spontaneous exchange among colleagues, in settings as routine as the lobby coffee shop on a Wednesday. Avoid hurrying the process; the best developments generally require time.

Error Number 8: Excessive Reliance on Overseas Support.

In many instances, startups depend on outsourced help for a range of developmental, operational, administrative, and marketing responsibilities. However, entrusting important information to overseas contractors, service providers, or suppliers entails substantial risks. Outside a select few locations abroad, readily available cheap labor rarely aligns with robust legal systems that are equipped to detect and combat intellectual property theft. Entrepreneurs must also exercise caution when utilizing freelance platforms like Elance, O-Desk, or others. The fine print of the user agreements on such sites can introduce unforeseen issues, especially if the relationships initiated on these platforms subsequently extend "off-site," leading to direct contact between the contractor and freelancer. In such scenarios, where the freelancer is located overseas or abroad, there's little hope of holding them accountable for errors or misrepresentations on a project that's gone awry.