A new company can be doomed if the right legal, financial, and intellectual-property protections are not put in place at the very start. That was the message from experts speaking on “Legal and Patent Strategies for Entrepreneurs,” a recent event jointly sponsored by the IEEE Boston Section’s Consultants Network and Entrepreneurs' Network. The Consultants' Network helps IEEE members establish themselves as freelance or independent contractors, while the Entrepreneurs' Network supports members who want to go into business for themselves.
“As you launch a business, it’s really important to set up its foundation,” says Thomas Durkin, one of the speakers and a managing partner in the law firm Gesmer Updegrove LLP, also in Boston. “You only have one chance to get it right.”
FIRST, THE GROUNDWORK
You won’t get it right if you try to do it all yourself, he says. “I don't think anyone starting a company is ready to actually run one without the advice of a legal team, including entrepreneurs who have done it before,” Durkin says. Choosing the corporate entity or structure that’s right for your business, he continues, “is the cheapest insurance you can buy.” There are six types of entities, and each has its advantages and disadvantages. An attorney can explain which one is best for you.
For example, a sole proprietorship is owned and run by one individual and there is no legal distinction between the owner and the business. The owner receives all the profits—subject to taxes, of course—and has unlimited responsibility for all losses and debts. A limited liability company, or LLC, on the other hand, provides limited liability to its owners.
The foundational structure helps ensure that financial records are kept properly, employees are paid, stockholders understand how to use their equity in the company, and angel investors can be approached confidently. “Those things are really important, even when in the beginning you don’t have a whole lot of money,” Durkin says.
He notes that setting up a company properly helps its operations go smoothly both at the start and down the road. He says his firm frequently deals with start-ups that are paying for mistakes years after they were formed. Some problems result because of founders who didn’t understand their rights or left themselves open to personal or financial liability, as well as from employees who weren’t clear about their roles and responsibilities.
Back in the dot-com boom, he says, many entrepreneurs anticipated going public after a few years, but today’s goal is to be acquired by a larger company. Having that declared intention from the beginning can affect the way incorporation papers are drawn up, which will in turn affect the way the company is successfully dissolved and investors are paid back. “The vast majority of the companies we work with now end up getting acquired,” Durkin notes. “That’s how investors are benefiting from their investments.”
Another important consideration is protecting the innovative technology behind the new company. This can be accomplished by filing for copyright protection and patents and by keeping trade secrets secret.
“Get a patent agent or attorney involved early on so you don’t miss important deadlines or steps,” advises another speaker at the event, registered patent attorney J. Scott Southworth.
Several patent processes have recently changed as provisions of the Leahy-Smith Act of 2011 go into effect. This law represents the most significant change to the U.S. patent system since 1952.
“It’s very complex,” Southworth says. “Even people who have done patents in the past need to be aware of the new setup.”
The law turns the U.S. patent system from a “first to invent” system to a modified version of the “first inventor to file” system used in the rest of the world, Southworth explains. This means that in most cases the first inventor to file for a patent on an innovation will receive the patent, even if someone else came up with the idea earlier.
You might want to check out this free podcast on design patents from the IEEE Computer Society. Authors Brian M. Gaff and Peter J. Cuomo provide an audio recording of their Computing and the Law column in which they discuss how design patents, though once relatively uncommon, are now used aggressively and—as recent events have shown—can lead to significant liability for those found to infringe them.
FORMING YOUR TEAM
Finding the right people for your start-up is no easy task, note the panelists. “Look for advisors—whether accountants or lawyers—who have worked with companies like yours in the past and who have experience in entrepreneurial ventures,” Durkin says. The experience should not only be in starting companies but also in helping with product development, intellectual property, marketing, and the possible sale of the company.
“Each decision you make will have an impact on the future,” he says, “so getting the right advice at the right time keeps things moving smoothly.”
For help with patent applications, Southworth says it’s important to find someone who has worked in the same technical area as your start-up. “Someone working in biotech and someone else working in the computer area have different issues,” he points out. He also suggests hiring patent agents or attorneys registered with the U.S. Patent and Trademark Office who would be allowed to act on your behalf.
Regardless of your advisors’ experience, hire people you like and with whom you can develop personal relationships. According to Durkin, the average life span of a start-up these days is five to seven years, so you should pick a support team you won’t mind having around for a while.
The panelists’ PowerPoint presentations are archived on the IEEE Boston Section’s Entrepreneurs' Network website.