Thursday, February 4, 2016 © Stephen A. Mason – 2016

To Patent or Not to Patent:When does IP drive startup value?

February 4, 2016 – Aggieland, Texas

Executive Summary

You almost always need some form of protection for your intellectual property.

The form of protection that you need (patent, copyright, trade secret, trademark) varies by the nature of the property and the business situation.

There are very helpful options (provisional patent application, copyright, trade secret, trademark) to delay and reduce the cost of acquiring protections.

Disclaimer

The information provided in this presentation is not legal advice and no attorney-client relationship exists on the basis of your attendance at this workshop or on the basis of anything stated herein.

If you want legal advice, contact information is provided at the end of the presentation to enable you to contact the presenter and seek to establish an attorney-client relationship.

Nothing that is said in this presentation is warranted for accuracy, usefulness, or clear-headed thought.

A Quick Road Map

“We’ll talk about the large print. You can read the small print, later.”

--Unknown Mortgage Bond Broker, 2005

Do I need a trademark, patent, and/or copyright?

Trademarks (2 slides)– A brand (words, names, symbols, devices or images) used with goods or

services to identify their source.

Patents & Trade Secrets (10 slides)– For the protection of inventions and improvements to existing inventions.

Copyrights (5 slides)– For the protection of the expression of ideas in literary, artistic, software and

musical works.

Business Case (11 slides)– Exactly how do I make money on this again?

A Quick Map of Intellectual Property:

PATENT/TRADE SECRETS

IDEAS

FUNCTION

COPYRIGHT TRADEMARK

EXPRESSION IDENTIFICATION

Trademark

What is a Trademark?

Words, devices, symbols or composite of both–also sounds, smells, colors, buildings, package shapes….

Distinguish your goods or services from others

No requirement to register trademark to be protectable–but registration increases protection

Trademark 3 of 6

What Rights Does a Trademark Protect?

Protects most precious assets of an enterprise - its goodwill

Provide quality assurance to customers

Protects against unauthorized use of owner’s mark

Patent & Trade Secret

What can be patented? Anything you invented:

– Machine – Article of manufacture – Process– Composition of matter – Improvement of any of the above

Note: In addition to utility patents, encompassing one of the categories above, patent protection is available for – (1) ornamental design of an article of manufacture or – (2) asexually reproduced plant varieties by design and plant patents.

Why would I want a patent?

1. To stop others - from making, using, or selling my invention (the Honey Bunny)

2. Licensing revenue- Make money on your innovation, no matter who is selling

3. Marketing - The product itself, because we all know that “patented” means “better”- Your company. We’ll talk about valuation later.

When do I want to apply for a patent:

Immediately, unless:– You want to keep it secret– You never want a foreign patent

Within one year (or else) from: – Any public use of invention– Any offer to sell invention– Any publication describing the invention

Failure to apply for a patent within one year from any of these events will bar you from ever getting a patent on the invention.

The patent tradeoff

Nature of patent – a complete disclosure of the invention – a 20-year monopoly

Whether this is a good deal, depends on your industry – Pace of change– Detectability– Reverse Engineering

What to patent

Focus on the key differentiator that builds value for your company, is likely to be copied by the competition, and is detectable.

The small print (read later): Patents

Patent term– Starts on issue date– Ends 20 years from earliest effective filing date

Right to exclude others:– Making– Using– Selling, – Offering to sell– Importing

Protection for function & structure– Prohibits all use, not just copying– Independent creation is not a defense– Caveat- A patent does not convey to patentee the right

to practice invention

Trade Secrets:

Really must be secret (take steps to suppress theft)

Last forever (Coca-Cola)

Does not prevent reverse-engineering

Must prove the theft itself

Tips for protecting trade secrets: Limit access to technical information on a “need to

know” basis.

Limit physical access to sensitive areas to approved personnel only.

Institute proper sign out procedures for software, documents etc.

Label confidential information as “SECRET AND CONFIDENTIAL”

Require confidentiality agreements, non-disclosure agreements and licenses for parties with access to trade secrets.

Copyright

Copyright examples:

Literary works

Motion pictures and other audio visual works Musical works (including accompanying words) Sound recordings Software Plans and Designs Semiconductor Masks

Requirements for copyright

The work must be original (you wrote it)

The work must be fixed in a tangible medium of expression (floppy disk, paper, hard disk)

Why register a Copyright

Registration enables suit against unauthorized copiers in Federal Court

Registration discourages some copiers Registration is not necessary to use the ©, but is

good evidence that you were the first to write/compose/draw/code

The Patent Business Case

Which protection is most appropriate to my business?

Patents– Pros: Strongest form of protection (protects ideas, not expressions); covers innocent infringers; term is

reasonable (20 years from filing date)– Cons: Relatively more expensive and time consuming to obtain

Trade Secrets– Pros: Inexpensive and term can be forever– Cons: Only protected for so long as secret; some things are not protectable as a trade secret (e.g., visible to all

in product)

Copyrights– Pros: Relatively inexpensive; copyright term is long (life of author + 70 years)– Cons: Thin form of protection; infringement only when expression copied.

Trademarks– Pros: Relatively inexpensive; term so long as used in commerce– Cons: Non-use, non-enforcement can destroy mark. – (e.g., Escalator, Linoleum, Kerosene, Cellophane, Thermos, Aspirin, Yo Yo and Bikini)

A quick outline on relative costs

Copyright registration is cheap and automatic– on the order of $1000 for a typical group of registrations

Trademark registration is cheap, but it’s not automatic– on the order of $1000 for a typical application, and an additional $3000-$5000

in prosecution to achieve registration

Patents are neither cheap nor automatic– On the order of $10,000-$15,000 for an application, and an additional

$10,000-$25,000 over five years to get the patent to issue

What we learn from the relative costs…

Copyright and trademark registrations are “no brainer” business decisions, if they are appropriate.

But we need to think hard about patents. The costs are high.

Why would I spend that much money?

Should I file a utility patent application

Sometimes, no. – Sometimes copyright or trade secret protection is just a better tool.

More often, “yes, but not yet.” – Sometimes the best route is to file a provisional application, and see

what your market looks like in a year.

Wednesday, March 30, 2016 © Stephen A. Mason – 2016

Why patent?... Access to funding!

According to the 2008 Berkley patent survey of entrepreneurs, 76% of venture backed entrepreneurs and 67% of all entrepreneurs say patents are absolutely vital to obtaining funding.

Link: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1429049## Link: http://www.nytimes.com/2010/08/06/opinion/06nothhaft.html?_r=1

Why patent? … Increase in valuation!

Is there anyone here who would not pay $30,000 for an asset to be valued at $3M in 5 years?

According to Greenberg (2010), a doubling of patent application stock is associated with a 22% increase in startups valuation, which translates to $2.9M per application.

Link: http://www2.druid.dk/conferences/viewpaper.php?id=500704&cf=44 Greenberg study sampled patenting and venture finance activity of 369 Israeli technology startups that received a total of more than 1000 rounds of financing between 1994 and

2009.

You just said $3M in valuation for $30k?

Maybe. It varies wildly. There are 7,000,000+ United States patents. Many are junk. But some aren’t.

Gambradella et al. (2008) base their results on the large-scale PatVal European survey, which asks inventors what is the minimum price for which they would sell the rights to their patent. They find that the distribution of

values is extremely skewed, with the mean patent value equal to 3.4 million euros (in mid 1990s euros) and the median equal to a tenth of that.

Link: http://onlinelibrary.wiley.com/doi/10.1057/emr.2008.10/pdf

Another patent valuation study ($2.3M) In Hsu and Ziedonis (2008)'s fixed-effects regression analysis of 813 financing rounds by 269 American

semiconductor firms they found that a doubling of a company's application stock is associated with a 28% increase in pre-money valuations which translates to a value of $2.3 million per patent in 2008 prices.

They also find that the signaling value of patents is greater in earlier financing rounds.

Link: Hsu, D. H., and R. H. Ziedonis. 2008. "Patents as Quality Signals for Entrepreneurial Ventures". Academy of Management Best Paper Proceedings

Yet another patent valuation study

Mann and Sager (2007) examine software firms that received their first financing round during 1997, 1998 or 1999, count their number of granted patents before December 2004 and relate it to the total investment received by a company before January 2005.

They find that an increase of 1 in the total number of patents is related to an increase of $2.7m ($3.04 in 2008 prices) in total investment.

Source: Mann, R. J., and T. W. Sager. 2007. "Patents, Venture Capital, and Software Startups". Research Policy 36, 193-208.

What happens when you don’t get the patent?

Lower valuation:

Hsu (2004) found that having no patents reduced a start-up's pre-money valuation by about 17% to 20%.

Source: Hsu, D. H. 2004. What Do Entrepreneurs Pay for Venture Capital Affiliation? Journal of Finance LIX (4), 1805-1844.

What happens when you don’t get the patent?

No funding.

Take the case of Stanford Immunologist, Sam Strober, one of the very top people in his field. He invented a new treatment for Lupus … and launched a start up called Innate Immune. Then he recruited the former director of clinical research at Genentech Dr. Andrew Pearlman to be the firm CEO. … Exactly the kind of opportunity that venture capitalists look for and sure enough, Innate Immune soon had VCs lined up and ready to commit 30 million dollars to develop the drug.

There was only one problem, they couldn’t get a patent. … So the VCs walked away. I mean what else could they do? Who would invest huge sums of money it takes to bring a new drug to market without any promise of market exclusivity and a healthy return on investment that a patent offers? And with no money of course Innate Immune couldn’t hire the scientists and technicians and marketing administrative staff needed to develop their drug.

Source: http://ipwatchdog.com/2016/01/27/start-up-reality-no-patent-no-funding-no-business-no-jobs/id=14659/

An example from MSFT – I don’t represent them.

MSFT has made five times more money from Android than from Windows Phone 7.– Microsoft gets $5 for every HTC phone running Android, according

to Citi analyst Walter Pritchard, thanks to a patent settlement with HTC over intellectual property infringement.

• Link: http://daringfireball.net/linked/2016/05/27/htc-citi

Of course, MSFT also lost $200M on a patent infringement case in 2009.– McKool Smith announced a $200m patent infringement verdict

against Microsoft in favour of i4i Inc. The complete verdict amount also included awards for lost profits and royalties.

• Link: http://daringfireball.net/linked/2016/05/27/htc-citi

How do I cut the cost?

File a provisional patent application– A provisional patent application is a placeholder patent application

that is never examined but that “stops the clock” and preserves for one year your right to file a patent application.

Advantages– You can draft it yourself (saving $15k in attorney time)– Filing fee to the USPTO is $150, rather than thousands

Disadvantages – No examination– You must follow up within a year!

Wednesday, March 30, 2016 © Stephen A. Mason – 2016

Wednesday, March 30, 2016 © Stephen A. Mason – 2016

About MHKKG:

Meyertons, Hood, Kivlin, Kowert & Goetzel, P.C. is a full service intellectual property law firm with a nationwide practice located in Austin, Texas. We have approximately 60 employees, including approximately 40 attorneys, patent agents and technical advisors specializing in the procurement, prosecution, litigation, licensing and counseling of intellectual property matters, such as patents, copyrights, trademarks, unfair competition and domain names.

Ranked in the top 20 law firms nationwide for providing the highest quality of issued patents (Intellectual Asset Management magazine, March/April 2010)

Ranked in the top 40 law firms nationwide for the number of patent applications filed (Intellectual Property Today, 2016).

About Stephen Mason: Stephen Mason’s practice focuses on patent application preparation and prosecution in

technical areas including semiconductors, microprocessors and memory, testing and verification, databases and storage, graphics processing, electronic commerce, network equipment and software, and mobile computing and sensor systems.

From 2006 to 2007, Stephen served as the general counsel of an Internet advertising company in Austin, Texas. His practice has previously included intellectual property aspects of merger and acquisition transactions, software licensing agreements and research contracts.

Stephen began his legal career at Bracewell & Giuliani. Prior to entering law school, Mr. Mason worked in PBX configuration and competitive intelligence at Nortel Networks in Richardson, Texas.

Mr. Mason is admitted to practice in Texas and before the United States Patent and Trademark Office. He received his Bachelor of Science degree in Electrical Engineering from Texas A&M University and his Juris Doctor degree from Baylor University. Stephen has served as president of both the Texas Aggie Bar Association and the Capital City A&M Club.

Wednesday, March 30, 2016 © Stephen A. Mason – 2016

For More Information, please contact:

Stephen A. MasonMeyertons, Hood, Kivlin, Kowert &

Goetzel, P.C.Building 2, Suite 3001120 S. Capital of Texas HighwayAustin, Texas 78746smason@intprop.com

Phone: 512-853-8826Fax: 512-853-8801

http://www.intprop.com

http://www.linkedin.com/in/stephenmason