IP Due Diligence – What Want to SeeInvestors

What is IP Due Diligence? • Due diligence is a review of a company‘s corporate records, including official filing docs, admin docs, board records, and IP records

Why IP matters• IP affects whether investors decide to invest in your company or not

• IP affects the valuation of your company

• Intangible assets (including IP) often account for 90% of a startup’s value*

* Source: Mary Juetten Do Venture Capitalists Care About Intellectual Property? http://www.forbes.com/sites/maryjuetten/2015/08/11/do-venture-capitalists-care-about-intellectual-property/

Sources of Investment• Angel Investors (Angels)

• Venture Capitalists (VCs)

• SBIR

• STTR

• Crowdfunding

•The “three F’s” of startup investors:◦ Friends◦ Family ◦ Fools

• Other sources of “seed money”

Angel Investors• Wealthy individuals who invest

• Sometimes invest on their own, sometimes invest as part of a group (Angel groups/associations/networks)

• Investment range: tens of thousands to several million (usually less than VCs, but more than most other sources)

• Examples in California: • Tech Coast Angels (Southern California)• Investor’s Circle (San Francisco)• Band of Angels (Menlo Park)• Pasadena Angels

Venture Capital• A firm that invests pools of other people’s money

• Typically invest in more established businesses, rather than very new startups

•Investment range: >angels, ~several million

•Examples in California: • Kleiner Perkins Caufield & Byers (Menlo Park)• New Enterprise Associates (Menlo Park)• Andreessen Horowitz (Menlo Park)• Google Ventures (Mountain View)• Khosla Ventures (Menlo Park)• Sequoia Capital (Menlo Park)• True Ventures (Palo Alto)

SBIR (Small Business Innovation Research)• SBIR: federal government program that encourages private small business R&D with commercialization potential (by providing monetary awards)

• SBIR Phases and Funding Amounts: • Phase I: establish feasibility, commercial potential, quality of business before further funding (up to

$225,000 over 6 months)• Phase II: continue R&D initiated in Phase I. Further funding based partially on IP status/strength (up to

$1,500,000 over 2 years)• Phase III: further pursuit of commercialization (no SBIR funding, may get funding from other

government agencies)

STTR (Small Business Technology Transfer)• STTR: similar to SBIR, but small business must formally collaborate with a non-profit research institution

• Goal: bring advancements from scientific research to commercialized products

• STTR Phases and Funding Amounts: • Same as SBIR, except…• In Phase I: up to $225,000 (same) over 1 year (instead of 6 months)

What Investors Want to See Generally…

Five “Million Dollar Point Approach” (some angels)

1. Market

2. Product

3. Team

4. Customers

5. Revenue

• Stanford Graduate School / Efrat Kasznik: a sixth point: Intellectual Property (particularly patents) add another $1 million!

• Angels may thus (typically) valuate a startup at up to $6m

Source: Efrat Kasznik:

http://www.slideshare.net/ForesightValuationGroup/angel-valaution-18-jun2014finalpresentation

Source: William H. (Bill) Payne

http://www.angelcapitalassociation.org/data/Documents/Resources/AngelCapitalEducation/ACEF_-_Valuing_Pre-revenue_Companies.pdf

SBIR and STTR Want to See…• Usually, to obtain Phase II award → must include commercialization plan in proposal.

Commercialization plan includes:

•Intellectual Property!!

Investors Want to See (for IP)… • Patents

• Trademarks

• Copyrights

• Inventorship/authorship vs. Ownership of IPo Assignmentso Licenseso NDAso Consulting Agreements

• Patentability (prior art) Searches

• Freedom to Operate

Foreign vs. domestic

Types of IPPatent Trademark Trade Secret Copyright

DefinitionThe right to exclude others from making, using, offering for sale, or selling the invention in the United States or importing the invention into the United States

A word, name, symbol, or device which is used in trade with goods/services to indicate the source of the goods/services and to distinguish them from the goods/services of others.

Information that:• is not generally known by the

public• confers economic benefit on its

holder• Is the subject of reasonable

efforts to maintain its secrecy

A form of protection provided to the authors or “original works of authorship.”

It protects the form of expression, rather than the subject matter of the writing.

Subject Matter Protected

• Design• Utility

o Processo Machineo Manufactureo Composition of matter

• Plant

• Words• Names• Symbols• Sounds• Colors and scents used to

distinguish goods and services

• Formulas• Practices• Processes• Sales methods• Distribution methods• Consumer profiles• Lists of suppliers and clients

• Literary works• Dramatic works• Musical works• Artistic works• Software• Other intellectual works of

authorship

Duration • Utility and plant: 20 years

from filing date• Design: 14 years from grant

date

10 years/renewable Forever Varies

Assignments vs. Licenses

Owner selling all the rights Owner renting out some rights

No conditions. You own it! Have conditions, e.g.:• You must keep the kitchen clean• Milestones• Etc.

Non-Disclosure Agreements (NDAs)• A promise to keep invention information secret• Can help preserve ability to file a patent • Can help preserve trade secret rights

• Also: a promise to surrender the rights to any improvements to the invention back to you!

Prior Art Searches• Prior art: Any existing information available to the public before the patent filing date

o Novel: is it new? o Non-obvious: is it new enough?

• Why are prior art searches important? o Prior art searches can help determine whether

your invention is patentable

Prior Art: Borat (November 2006)

Patent Application (February 2008)

Novelty – is it new? Your Invention: Prior Art:

Obviousness – is it new enough?

Your Invention: Prior Art:

Freedom to Operate • Freedom to Operate: are you infringing on anyone’s patent?

• Why are freedom to operate analyses important? o Freedom to operate helps assure you that your business will not be sued for IP infringement o Sophisticated investors (i.e. Angels and VCs) are more likely to invest in your business and/or invest

more if they can be assured by a freedom to operate opinion that your business is safe from the risk of being sued

Patented invention: A tool device comprising:• an iron block• a handle attached to the iron block

Your invention:

Infringing?

Yes

Freedom to Operate (continued)• Just because you have a patent doesn’t mean that you cannot be sued by others for patent infringement.

Your competitor’s not-so-fancy patented “car”Your patented fancy car

Freedom to Operate (continued)Your competitor’s not-so-fancy patented “car” with four wheels

Your patented “car” with three wheels

Takeaways• Smart, big investors (angels, VCs, government) will want to know about your IP!

• IP affects the valuation and investment decisions of investors • Patents generally add more value than other types of IP protection for startups• Strong IP can make you $$$

• NDAs can protect your idea before you’ve filed a patent

• Prior art searches can determine the patentability of your invention

• Freedom to operate studies can reassure you (and your investors!) that you will not be sued for patent infringement