Source: Solomon Brenner, Angel Capital Association Member (Keiretsu Forum Mid-Atlantic)
Whether the patent process is worthwhile and beneficial depends on the inventor, the opportunity and the timing. Deciding to go through with the process can be intimidating, costly and time-consuming. That’s why I decided to call Danielle Williams, an attorney at Winston & Strawn who has handled dozens of patent cases.
Some of the benefits of patenting an innovation include:
- Disclosure becomes easier when talking about the invention because it’s protected.
- Being able to talk freely gives investors more information and generates more interest.
- The process of getting a patent forces critical thinking to identify what’s unique about it — and it’s often more than originally thought.
- More people can be brought into the process without fear of betrayal.
- It creates distinct understanding of ownership if there are conflicts later.
- It creates a guarantee of a monopoly if someone tries to reverse engineer it.
The existence of a patent has proven to benefit funding opportunities. “We’re able to show if a company had patents, there’s a significant increase in their ability to get first and second round funding,” she said.
One reason it raises more money is because the inventor isn’t as restricted or hesitant to talk about the product. “It gives an entrepreneur the opportunity to speak about what’s happening on the other side, to talk to potential funders,” she said.
Investors may be unwilling or hesitant to sign a non-disclosure form, which limits how much the company shares because saying too much will result in waiving rights to their secret. The existence of a patent eases the very real risk of saying too much and jeopardizing ownership. The cost to get a patent is in the range of $5,000 to $7,000. It may be difficult to spend that kind of money when the inventor is scraping for funding. However, there are organizations that will pay for the patent application in exchange for equity stake. “It’s a great way for folks who don’t necessarily believe they’ve got access. They can get access,” she said.
Even the process of analyzing the product for a patent can identify improvements and unique features. “The depth and breadth of claims could have been more robust. If an entrepreneur gets the opportunity to talk with a patent expert, they’ll be able to look at the invention not from one dimensional level but turn it over and look at all facets.” Those facets are a multitude of independent and dependent claims, system claims and method claims.
From an investor perspective, the most pressing issue is having an understanding of ownership and scope of ownership. In many cases, the startup is two friends who implicitly trust each other and don’t plan for the breakup of business or friendship. Failure to prepare for that situation significantly increases risk for an investor.
Another option besides a patent to lock down the technology is using trade secret protection. The difference is in the life cycle of the product. “If you think you’re on the cutting edge of certain technology and not sure where it’s going to go, you might go patent protection route,” she said.
Meanwhile, if there’s an established market with an established product and you’re refining the products routinely with a life cycle of about two years, the best option may be moving forward with trade secrets. One option is to put together a patent filing and designate certain information in the filing as a trade secret. That makes sure everything is documented internally even before it’s filed.
An advantage of a patent is even if someone reverse engineers the patented product, you can preclude or exclude them from market based on patent because you have a 20-year monopoly based on the claim. The law in this country gives preference to the first to file, not the first to invent. Timing is always important. “You’ve got to get your app in on file as soon as possible,” she said.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 45 professionals serving more than 130 companies throughout the region.