WIPOD – Page Points: Transcript of Episode 6

Intellectual Property and Start-ups

Lise McLeod: Several of the world’s most valuable companies had humble beginnings as start-ups and were founded by influential entrepreneurs such as Steve Jobs, Elon Musk, and Mark Zuckerberg.

A start-up is a young company that has developed a unique business idea. The start-up aims to make an instant impact and to eventually take over the market.

Today’s conversation with Stefan Golkowsky is all about start-ups as Stefan is the editor of the book entitled ‘Intellectual Property Strategies for Start-ups: A Practical Guide’. This highly useful book highlights the need for start-ups to protect their intellectual property from the beginning of their business processes, ultimately avoiding costly consequences later on.

Welcome to the podcast Stefan.

Stefan Golkowsky: Hello! Thank you very much for having me.

Lise McLeod: Could we begin our conversation by you telling us a bit about yourself and how you became interested in intellectual property?

Stefan Golkowsky: Of course. I’ve been a patent attorney for more than 20 years. My day-to-day work mainly involves working on IP portfolios for companies in the medtech industry and on the IP side of mergers and acquisitions.

In my daily practice, I’ve met many interesting experts from a wide range of fields – some of whom are now my co-authors. Over time, we realised that many companies – especially start-ups – struggle with the same problems with regard to IP, over and over again. Almost all of these problems are avoidable if a clear strategy is followed. The idea for this book came from our desire to provide practical guidance to help avoid these problems.

In this context, I would like to thank all my co-authors: Daniel Brueggemann, Rudolf Freytag, Rainer Gith, Manuel Juette, Ashkan Kalantary, Peter Karge, Christina Lubinski, Thorsten Lubinski, Werner Maentele, Uwe Schriek, Christoph Viebig, Leif Zierz.

Lise McLeod: Who is the intended audience of the book when you refer to a company as a start-up?

Stefan Golkowsky: When we talk about start-ups in our book, we are focusing specifically on tech start-ups. A tech start-up is a company that wishes to bring technology products or services to market to solve a problem where the solution is not obvious and success may not be guaranteed.

With this in mind, the book should be of interest to a wide range of readers. First – and most obviously – are the founders of start-ups themselves. The book explains how awareness of IP protection can reduce the risk of legal losses and considerable financial disadvantages for them.

The book will also help investors to better protect their assets; and will help legal practitioners and auditing and consulting professionals to avoid pitfalls in the due diligence process and in the valuation of IP as an asset of a start-up.

To elaborate on the background to the book: many start-ups are so completely focused on their business idea that they overlook the importance of protecting their IP, but it’s crucial for them to protect these valuable assets. This book explains the basics of IP rights and how to develop a successful IP strategy. It presents extensive practical advice for start-ups, including guidelines on contract drafting. Its main objective is thus to help founders and their consultants avoid making major mistakes with regard to IP.

Lise McLeod: Thank you Stefan. Which intellectual property rights are particularly referred to in relation to an IP strategy?

Stefan Golkowsky: This book deals with the subset of IP that is relevant to commercial enterprises – also referred to as ‘industrial property’. Typical relevant IP rights include patents, industrial designs and trademarks. In addition, certain aspects of copyright of importance to start-ups are discussed – in particular, with regard to software.

An overriding strategic IP objective for a start-up is an accurate assessment of its IP position at the point of exit – for example, when selling the company or going public. The start-up’s value should be as high as possible at the point of exit.

One factor that is critical to secure a good company valuation is a strong IP position, which is transparent and verifiable for potential investors. A company’s IP might include, among other things:

patents, which protect the technological basis of its business and prevent its products from being copied;
registered designs, which protect the external appearance of its products from being copied; and,
trademarks, such as word marks and/or picture marks, which prevent other companies from using that name or picture.

There are also several other factors which underpin a strong IP valuation. For instance, in-depth freedom-to-operate (FTO) analysis can provide some degree of certainty that no property rights of others are being infringed, and that market entry will not be delayed or prevented by patent disputes.

Good contracts with cooperation partners, in which IP is clearly assigned are also helpful in this regard. And, it should likewise be clear that the IP rights really belong to the start-up, and not to the cooperation partners, the private founders or a research institute from which the start-up emerged as a spin-off.

Lise McLeod: The book examines intellectual property from different perspectives with authors active in China, the United States of America, the United Kingdom, Denmark and Germany. With the IP regimes being different, how did you approach this when compiling the various content for the guide?

Stefan Golkowsky: Great question! The authors of this book come not only from different regions of the world, but also from different disciplines. However, what we all have in common is that we all deal with IP in our day-to-day lives.

In writing this book, it was very interesting for us to learn about each other’s different viewpoints and, in doing so, to rethink our own. We hope that in this way, readers will also gain valuable insight into the various aspects of IP. This should be particularly useful for start-up entrepreneurs and their advisers; and should help them to engage with discussion partners with different interests and use this new understanding to the advantage of their companies.

As you mentioned, the authors are international – active in the US, the UK, China, Denmark and Germany. As the regimes in these countries diverge considerably, it was impossible to discuss every regulatory detail in each jurisdiction. We have at least tried to explain basic principles that apply to most situations, but also pointed out that significant differences can occur.

Especially if a start-up operates across borders – either initially or while geographically scaling up its business – the law of all relevant countries must be taken into account. As these provisions can vary substantially, complex situations may arise and care must be taken to balance the different requirements – with respect to both the rights in an invention and the development of an appropriate international IP strategy.

Lise McLeod: Could you please give us an example of those different requirements?

Stefan Golkowsky: As an example, let’s take a look at the legal situation with respect to employee inventions. Some countries require the filing of a domestic patent application for an invention made in the respective country (or even by a citizen or resident of that country) before any foreign patent applications may be filed. Such provisions apply, for instance, in the US, China, India, Italy, Spain, France and Russia. These requirements may conflict or compete with one another, as well as with specific national provisions on employee inventions.

In the book, the legal situation regarding employee inventions in several selected countries is outlined to highlight the divergences between these regimes. Where special examples were needed, we primarily referred to the regulations in Europe – in particular, in Germany. That said, as mentioned, it wasn’t possible to undertake a comprehensive treatment of each regime, so specific legal advice should be sought in cross-border situations.

Lise McLeod: It is mentioned that a start-up must have a clear focus in terms of both content and region. Could you provide a brief outline of what should be included in say, business models or life insurance policy for founders and investors?

Stefan Golkowsky: I believe that we can draw some clear conclusions here. During the preparation for this book and the detailed discussions with my co-authors, many insights from my own practical work were confirmed. In addition, I learned about several new issues and now view certain other matters through a different lens. As a result, I now consider several principles to be essential in connection with IP strategies for start-ups.

First, a start-up should have a clear focus, in terms of both content and region. This should – if at all possible – be cost-effectively protected by the appropriate IP rights, so that the business model cannot simply be copied by third parties. The IP rights thus represent a life insurance policy for founders and investors. In the case of IP rights, particular attention should be paid to compliance with the legal framework – for example, the law on employee inventions and the legal background regarding university inventions.

Second, it is important to clearly explain the start-up’s IP situation to investors – in other words, “Do good and talk about it.” The specific interests and technical backgrounds of the relevant parties should always be borne in mind here. For example, M&A lawyers have a different focus from patent attorneys – even if both are essentially looking for legal pitfalls. Economists, on the other hand, take a somewhat different approach; although here too, there are differences between venture capitalists and auditing firms, and there may also be different focuses depending on the region.

Finally, in addition to acquiring its own IP rights in line with its intended business model, a start-up and/or its licensees must be able to exercise the business model – in other words, it must have freedom to operate (FTO). In this regard, it is important to recall that patents are only ‘prohibition rights’: the mere fact that a start-up holds a patent that can be used to prohibit a competitor does not mean that this patent can always be used by the start-up itself. For example, a competitor could hold an additional or earlier patent which frustrates the start-up’s plans; we explore this through the tennis ball example discussed by my co-author Uwe Schriek in Chapter 2 of the book.

Lise McLeod: What should be taken into account for when a start-up speaks to ‘would be’ investors?

Stefan Golkowsky: The founders of a start-up must solve many different challenges and pay particular attention to good capitalisation of the company, as without the necessary funding, the steps for success cannot be implemented. In deciding whether to invest in a project, external investors will check the company’s substance and evaluate various risk factors in order to create a risk profile. Their decision will be based on the risk and the expected return.

IP rights are a powerful instrument to reduce the risk of investment and thus facilitate positive investment decisions.

Apart from IP aspects, several core risks play a role in all investment decisions in the start-up sector. Depending on the size of the start-up and the type of investor, these risks may be weighted differently; but a start-up should have strategies for all of them.

In preparation for talks with investors – as my co-author Thorsten Lubinski nicely points out in his chapter – the start-up should think about answers to several questions. For example:

Do customers really want the product?
Can the start-up build a powerful team?
Can the start-up build the necessary sales structure?
Is the market big enough?
Can the start-up raise enough capital to reach milestones?
What differentiates the product from the competition?
Are these differentiating features sustainable?
What advantage does the start-up have that nobody else has?

Another aspect that, while not necessarily IP-related, is decisive in determining whether a start-up is in a position to consider an investment application at all, is the ability to describe its purpose briefly and clearly. This might sound like a trivial point; but unfortunately, start-ups in many cases lose themselves in flowery descriptions of their vision in order to appear more ‘professional’ and avoid being rejected for investment because of an overly narrow idea. In fact, the first one or two sentences of the company description should evoke the right image in the minds of investors, so that they have a clear idea of the start-up’s purpose. A good example is the video conferencing provider Zoom, which states that its purpose is to “make video conferencing easy”.

Lise McLeod: I would now like to take this opportunity to ask you if you have concluding words of advice for a start-up company?

Stefan Golkowsky: Allow me to focus again on the IP aspects.

As previously pointed out, every start-up – and especially every high-tech start-up – has to struggle with the same problems with regard to IP. Almost all of these problems are avoidable if a clear strategy is followed from the very beginning.

In order to save money and effort, a start-up must have a clear focus, in terms of both content and region. This should – if at all possible – be cost-effectively protected by the appropriate IP rights. IP rights thus represent a life insurance policy for founders and investors.

Again, the most important objective is to avoid fundamental mistakes when setting up a start-up; in this way, the IP due diligence in the event of an exit will be significantly expedited and potential problems avoided.

Lise McLeod: I would like to thank you for joining me today Stefan and to extend my thanks as well to the authors of the book’s content. Its content clearly explains the need for start-up companies to protect their intellectual property from the beginning and is a very good starting point for researching what can be done to develop a successful IP strategy.

Stefan Golkowsky: Thank you for having me. It's been a real pleasure, thank you.

Lise McLeod: I hope that you enjoyed my conversation with Stefan. We have a digital copy of his book in our knowledge repository, along with other practically-oriented books for IP and business. A special shout-out to our own WIPO IP for Business series.

Until the next time, and the next Page Points, bye for now!