Patent Rights and Attracting Investors

By: Ivan T. Kirchev

It is very important for startups, entrepreneurs, and small companies to protect their intellectual property rights. Creating a patent portfolio (or even several pending patent applications) will improve the company’s ability to attract venture capital financing. Typically, investors are faced with different uncertainties when they evaluate a startup and they often rely on patents (or pending patent applications) as indicators for calculating the company’s potential. For that reason, startups, entrepreneurs, and small companies have to understand not only the patent application process, but the patent assignment processes as well.

Correctly assigning the patent rights of an invention to the company should be as important for a startup as is filing patent applications or acquiring patents for its core technology or business model. A patent assignment is a transfer or sale of the entire interest in a patent. In other words, all rights that were originally granted to the patentee will transfer to the assignee. Generally, patent assignments can be made during the application process, or after a patent issues. It is recommended that patent applications be immediately assigned from the inventor(s) to the company so that the company can control the prosecution of the application and can add the patent (when issued) to its portfolio. Although recording an assignment with the USPTO is not required, recordation can protect against confusion as to the true owner of the patent.

A company’s patent portfolio is crucial to its ability to attract investors, and therefore a company should make sure that all patent rights are properly documented and assigned to the company. Before investing in a startup or a small company, investors typically conduct due diligence to investigate ownership, chain of title, product marking practices, maintenance fees, and litigation issues relating to the company’s patents. Startups, entrepreneurs, and small companies should be aware of some ownership issues related to their patent rights. There are several issues that can impact a company’s ownership of patent rights:

  • Incorrectly drafted employment contracts. Generally, employment contract bind an employee to assign all inventions and discoveries within the scope of employment to the company. However, some employment contracts fail to include such provision.
  • Absence of employment contracts, and rights of co-inventors. In the absence of an employment contract or an agreement with each inventor addressing the assignment of an invention, each co-inventor or prior assignee retains the right to practice, and perhaps assign, the invention without compensating or even notifying the other co-inventors or assignees.
  • Rights of former employers. Many startups are founded by former employees of other, typically larger companies. If this is the case, the prior employment contracts of the founders and inventors of patents and applications should be examined for provisions that allow a former employer to assert rights in the company’s IP or provisions that limit the former employee’s ability to compete in its technology and market areas.
  • Rights of universities. Because many startups are based on technology that is first developed by professors or graduate students, agreements between universities and inventors of that technology should be studied to ensure that a university cannot assert rights in the company’s IP.
  • Rights of the government. A company funded by the government should be aware that the government might retain rights in a patented invention resulting from the government support.
  • Rights of spouses. When a company is owned by both spouses, it is very important to decide and understand who owns the majority shares of the company and, therefore, rights to the company’s IP. For example, if the spouses get divorced the person who owns more shares of the company’s stock can ultimately receive ownership rights of the patents and the entire company.

In summary, potential investors not only evaluate the intellectual property assets of a startup (e.g. patents, etc.), but they also examine the assignments of the patent rights of these companies to ensure that the core technologies of these startups are protected with patents correctly assigned to the companies. An entrepreneur or a startup company should accordingly be aware of the importance of intellectual property rights protection and proper assignment of these rights.

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