To prepare for a raise, every startup should expect to address the IP concerns investors will likely have. We’ve surfaced some of the most commonly asked investor questions below.
What makes your business defensible?
Defensibility is the ability to protect your business from competition, especially in the long-term. An example of defensibility may include high switching costs, where customers remain loyal because transitioning to a competitor could involve a significant investment of time, money or deployment. Network effects are another form of defensibility, particularly in marketplaces, where users themselves make the service more valuable for every other user. Customers may be compelled to stay as the number of users increases, because the value of the network also increases. For particularly innovative businesses, IP can be a main defensibility mechanism.
What IP do you have?
Investors want to know what is proprietary to your business, as it corresponds with valuation. Your company’s IP can include trade secrets and copyrights, both of which can take effect without any government filings. This is in addition to the more obvious patents and trademarks, which do involve formal filings. IP can include proprietary datasets, AI models, algorithms, designs, experimental results, drug targets, and so on. It’s important to understand what makes your business unique and be able to effectively communicate this to potential investors.
Does your company own the IP?
Investors want to know if your company owns its IP because that is what makes your business investable. If your company doesn’t own the IP central to the business, then the entity that does own the IP could prevent your company from going to market or potentially shut your business down. In order to ensure that your company owns its IP, it is essential to have any employees sign an invention assignment agreement if they have contributed to the development of proprietary technology. These agreements assign ownership of inventions from individuals to the larger organization.
Is the IP related to any work you did at a prior employer?
Investors want to know if your current company’s IP is related to the work you’ve performed at a prior employer because this underscores the above: does your company own the IP? If the IP at your current company is closely related to the work that you were doing at your previous company, you should first confirm that your previous company does not own the rights to this IP. Secondly, you should ensure that your previous employer doesn’t own any patents that would block your current company’s freedom to operate. Both of these issues could restrict or even prevent your company from bringing its product or service to market.
Have you filed any patent applications?
Investors want to know if you have any IP filings. This is particularly important for life sciences and hardware businesses, as IP is paramount to the company’s overall success. You will want to share information about the patent applications you filed and investors will likely ask to read them. The types of patent filings that you can discuss include provisional, non-provisional, and allowed applications. Provisional patent applications may be stripped-down or rudimentary, but they jumpstart the filing process and establish an early filing date. Investors may ask to view these applications, as the material is considered “patent pending.” Non-provisional patent applications that have been filed with the USPTO and are still pending would also be considered patent pending. These filings are more comprehensive, and it is often a multi-year process for patent prosecution, so investors likely wouldn’t expect to see any issued patents for an early stage company. However, allowed applications and issued patents are exceedingly impressive, so if your company has obtained any patents, this information should be shared with investors.
What countries are you planning to pursue IP protection in?
Investors want to know where you intend to obtain IP protection if you plan on filing patents. To answer this question, you may want to speak with an IP lawyer to determine where it makes sense for your company to seek patent protection. It would be incredibly expensive, and therefore not worthwhile, to file in every country. To satisfy investors and protect your business, you should plan to obtain protection in all of the major markets where you will sell your product. Common targets for filing patent applications outside of the United States typically include one or more of the EU, Canada, China, South Korea, Japan, and/or Australia, but this may vary depending on the field and nature of your business.
Do you own the trademark on your product and company name?
Investors want to know if you have obtained trademark protection for your company. This is especially important for consumer businesses focused on building brand awareness. Without trademark protection, there is nothing stopping copycats and clones from springing up overnight, especially after a visible and successful launch. Unfortunately, separate parties may seek to capitalize on your visible brand by drawing attention to their own products or by leading consumers to believe that their products are endorsed by your company. Having and asserting registered trademarks is an effective way of determining and policing this harmful activity.
Have you licensed any IP from others?
Investors want to know if you have licensed IP from other entities. This question may be most relevant to startups that have spun out of a university or larger organization, as the spinoff may need to license the IP from the larger entity if it is core to its business operations. In this case, it is advantageous to have exclusive licenses so that competitors cannot also license the IP and compete against you.
Do you have freedom to operate?
Investors want to know if your company has freedom to operate, often referred to as FTO. This is the ability of your company to make and sell its intended products and services in its intended markets without infringing on patents belonging to another entity. Investors may ask if you’ve performed a FTO analysis and inquire about the results. They may also ask for a written FTO opinion from your lawyers to determine whether your contemplated product would infringe upon any patents. It is recommended that this search and/or analysis be performed prior to going to market, because a lack of FTO can completely derail the business. You do have freedom to operate if your contemplated product omits at least one element of each independent claim in the patents retrieved in the search. IP lawyers can help you conduct the FTO search and analysis and interpret the results.
To read more: What is Freedom to Operate (FTO)
What are your IP plans after the investment?
Investors want to know how you will spend the money that they are investing in your company, especially as it relates to IP. Outside of other areas of the business, like R&D and Sales, it would be valuable to share with investors your overall IP plan and budget. This should include patent protection, in the U.S. and abroad (if applicable), patent portfolio development, and trademark registration.
IP Diligence Requests from Investors
Investors will commonly ask for documentation related to their IP diligence requests. In addition to being prepared to answer the above questions, it would be beneficial to have the following documents readily available for your conversations with investors:
- IP assignment agreements from founders, employees, and contractors.
- Identification of all IP that has been filed, such as patent and trademark applications.
- Copies of patent applications.
- FTO written opinions.
