Q: When to Incorporate and Options for IP protection

Written by Sean Murphy. Posted in 2 Open for Business Stage, Legal Issues, skmurphy

Some quick answers to common questions about how to protect your intellectual property (IP) and when to incorporate. 

IP Protection

  • Copyright can be secured just by marking your source code and content appropriately. This should be a default for all of the source code and written materials that you develop.
  • Trade Secret use non-disclosure forms for company confidential and trade secret material. This should be a default for any real secrets that you have (one exception is that most investors will not sign NDA’s, it’s a better strategy to limit disclosure to what’s strictly needed).
  • Trademarks are relatively low cost and protect unique name graphics/icon associated with your firm and products. These are renewable and are always a good idea for good product names and tag lines.
  • Patents: depending upon your industry these can be a source of significant advantage (e.g. hardware, semiconductor, medical device) or less likely to be needed (e.g. software). These are expensive (patent agent will charge about $10,000 to file and take you through first office action, patent attorney $20,000 or more) and can take years. Startup Guide to Intellectual Property Protection by Pete Tormey is a good beginning treatment:  He spoke at a Bootstrapper Breakfast in Silicon Valley last year on “When to Apply for a Patent

Incorporation

If you are part of a team and are going to start transacting business–taking money from customers–it’s a good idea to setup a corporation that all of the founders have some ownership in. There will also be contract and licensing issues that you will not want to ignore. If you are in early market discovery it’s less necessary but if you find a real niche for your MVP and start taking money from customers you will want create a structure. If you are solo then you can rely on a default form of sole proprietorship but this may not be the best long run approach for a variety of reasons (taxation, risk management, ability to accept investment, etc..).

Please do not incorporate as an LLC: if you are a technology startup it is an extremely rare combination of constraints that would dictate LLC is best form of the business. For California startups LLC offers an unfavorable tax treatment compared to a Sub-S (C Corporation Subchapter S) which most bootstrappers use.

Q: What About If I Am Currently Employed?

Chris DiFonzo is a serial entrepreneur who founded Wiseman Media Corp and OpenDesks, Inc. and has had several stints at larger firms like Intel and Siemens. He is not an attorney but he offered some excellent practical advice on protecting your ideas and IP while still employed and was kind enough to give me permission to publish it here.

Generally, especially if employed by a larger corporation that doesn’t perceive your work confined to particular hours or digital boundaries, it’s best to fly under the radar until you can’t and then cut bait before ever bringing something to fruition. Unless it’s entirely unrelated and then nobody cares. But they will care about asking them to spend time and effort on something they shouldn’t have to care about.

A few guerrilla basics on this topic:

  1. You (employee) can’t protect something you may invent, not at the time time of hire, nor during employment as an amendment.
  2. You (employee) can protect an invention. You cannot protect an idea.
  3. Employer can’t claim your unrealized idea.
  4. Employer can’t claim your unrealized invention.
  5. You may also have a “best efforts” clause (or the effect) and a clause limiting your ownership above x% of any company, etc. without advising employer.
  6. If you work on your idea while employed, you can stay in safe territory if:
    1. You never use company property or networks.
    2. You never work on it during company time
    3. You don’t launch or incorporate while employed.
    4. Your idea is truly unrelated to your current work or Employer’s business.
  7. If idea is at all related, benefits directly by any measure from or leverages in any way intellectual property or experience you’re gaining on the job, or you launch/incorporate while employed, you’re on shaky ground.
  8. During employment, Employer is more likely to be open to negotiating an amendment if idea is related, does benefit them, and non-negotiation is making you reticent to be all in intellectually. If you’re a software developer and you want to build a better pancake press, Employer is a. highly unlikely to proactively engage in a distracting, time-consuming, expensive legal intervention that they have no bandwidth for, b. will argue its unnecessary, and c. will not attempt to nor successfully make a claim on your this invention in the future – especially if you follow #6.

SKMurphy Perspective

Chris offers some very practical advice. California Law has a clear exemption for inventions developed exclusively on your own time with your own materials, but your state or country may treat this situation differently. If you are concerned it’s worth buying an hour of an attorney’s time who understands these invention assignment agreements and the governing law for the agreement and have them brief you on your situation and options. Your employer does not have not have to have any contact with your attorney nor does your employer have to know you have retained an attorney. It’s a specialized area of the law that merits paying a small amount to understanding the risks and your options.

 

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