Lifecycle of a tech startup series: Intellectual Property

26 November 2020

In our last instalment our founders, Sarah and Chris, considered the basics in establishing their tech startup and they incorporated a company under the registered name ‘KNow Wear Limited’. As part of the incorporation process, our founders started to think about any intellectual property rights (IPRs) the business was using and ownership of the same. In this blog we shall be exploring the IP considerations founders should be considering in a bit more detail.
Do a stock check 
The IP of a tech startup is typically its most valuable asset and many founders, in their eagerness to get their startup off the ground, forget to pay attention to the ownership and protection of such IP. Therefore, as our founders continue to grow their business, they need to be aware and take stock of the IP that they create to aid such growth. 
In light of this, our founders decide to consider the types of IP that have already been created in respect of the business. 
1. Copyright. When we first met Sarah she had already started building a web-based platform for KNow Wear Limited’s wearable wellbeing device to link to. As part of that process, Sarah developed the original computer code for the website and produced artistic designs of both the look and feel of the site and the wearable device itself. Under copyright law, the code is considered a literary work and the designs are an artistic work and copyright automatically subsists in each of them.
Original works protected by copyright may not be copied by any third party for a specified period, typically for the lifespan of the author and a period of 70 years from the end of the calendar year in which the author dies. It’s important to note that copyright does not protect ideas i.e. our founders cannot rely on copyright to prevent third parties from producing web-based platforms and wearable wellbeing devices. However, our founders can rely on copyright to prevent copying of the code and designs developed in respect of their web platform and device i.e. protecting the expression of Sarah’s ideas, rather than the ideas themselves.      
2. Design rights. Sarah’s designs of the wearable wellbeing device may be protected by design rights as well. Design rights protect new/original designs of the appearance of a purely functional product e.g. a novel shape of the strap on the wearable wellbeing device, as opposed to any pattern on the strap itself. Unregistered design rights arise automatically on creation of the design, but you may be able to get greater protection by applying to the Intellectual Property Office (IPO) to register an original design. Unregistered designs, depending on the circumstances of their creation and how they are exploited, prevent third parties from copying them for either 10 or 15 years after creation, whereas registered designs provide the owner with a monopoly over use of the design for 25 years. 
3. Trade marks. In our last instalment in the series, Sarah and Chris applied online to the IPO for a trade mark in respect of their company’s unique brand name and logo. Their application was successful and so no third party may use an identical or similar brand name or logo in connection with the goods or services in respect of which the trade marks have been registered. This gives KNow Wear Limited clear protection from copycat brands attempting to profit from the goodwill and market recognition that our founders intend to develop. 
Who do all of these IPRs belong to?
Aside from the trade marks registered by KNow Wear Limited following its incorporation, all of the IP referenced above was created by Sarah in a personal capacity. Under English law, as the creator of the IP, Sarah is the owner of the same. As a result, apart from the registered trademarks, none of the key IP used by KNow Wear Limited is actually owned by the company. 
Is this an issue? As we have already discussed, much of the value in a tech startup arises from its IP. In order to grow KNow Wear Limited, our founders may need to start thinking about seeking investment into the business, and prudent investors, when carrying out due diligence on the company ahead of any proposed investment, will require the company to own all of the key IP used by the business. 
If you realise, in your capacity as a founder, that you own your business’s IP, rather than the company through which the business is run, you should think about assigning ownership of the same to your company. This can be done using a deed of assignment, which Sarah enters into with KNow Wear Limited, thereby transferring ownership of all the IP she has created to the company. 
Is anyone helping you develop IP?
Before KNow Wear Limited was incorporated, we know that one of Sarah’s developer friends helped her with the development of the code relating to the web-based platform. As mentioned above, under English copyright law, the default position is that IP vests in in the individual who has created it. Mindful of this, following incorporation of KNow Wear Limited, Sarah asked her friend to enter into a deed of assignment with the company in respect of the code that she developed, and she was happy to do so, thereby transferring ownership of the same to the company. 
However, not all consultants will be as cooperative as Sarah’s friend and may resist signing a deed of assignment unless, for example, they are paid a specific sum, thereby effectively holding the company to ransom. Don’t leave documentation of ownership of IP until after it has been created. Instead, when engaging a consultant, ensure that you enter into a consultancy agreement with them at the outset of the engagement which contains clear provisions stating that all IP created during their engagement is assigned to the company.        
The major exception to the default rule above, regarding ownership of IP vesting in its creator, is where IP is created by an employee in the course of their employment. In those circumstances, the IP is automatically assigned to the employer on creation and, whilst this is an automatic statutory right, you should ensure that it is backed up contractually in a well-drafted employment contract which contains similar terms. 
A word of warning 
Given that the IPRs mentioned above primarily prevent copying, it almost goes without saying that you should take care not to copy any IP that is owned by a third party e.g. IP owned by a consultant you have engaged without first entering into a contract which deals with IP or, more obviously, the IP of a competitor or any other business. Doing so could leave you and/or your company open to an IP infringement claim from the IP owner. 
If you do want to use IP owned by a third party, you should seek to either enter into a deed of assignment with them (so that you own the IP going forwards) or a licence agreement, whereby the owner of the IP will grant you a right to use the same for an agreed purpose and period, although without relinquishing ownership. 
If you would like advice on IP, then please do contact one of our specialist intellectual property lawyers here
Thanks for reading! Join us next time when we will be looking at KNow Wear Limited’s preparation for a fund raising round. 

Lifecycle of a tech startup series

Episode 1

Case study

Welcome to the first blog in the series on the lifecycle of a tech startup.

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Episode 2

The basics

Last time we met the founders of a wearable tech startup, who wanted to take the next steps towards establishing their business.

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Episode 3

Intellectual Property

As part of the incorporation process, our founders started to think about any intellectual property rights (IPRs) the business was using and ownership of the same. In this blog we shall be exploring the IP considerations founders should be considering in a bit more detail.

Read the blog

Episode 4

Preparing to raise investment

In the last instalment we talked about the ways in which the founders of KNow Wear Limited could protect the intellectual property in their business. Since then, the business has been progressing well and our founders have been working on developing a prototype.

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Episode 5

Tech in Two Minutes/Lifecycle of a Tech Startup - Essentials for e-commerce businesses in the UK

Alex Torpey speaks about the legal notices and key points to note for online retailers and platform operators in the UK.

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Episode 6

Tax reliefs

After a brief detour to consider the essentials for e-commerce businesses in the UK in episode 5, you and the other founders are now once again focusing your efforts on raising investment.

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Episode 7

Seed raise

Having decided in episode 4 on targeting angel investors to raise £500,000 investment in the business, the founders of KNow Wear Limited researched various angel investor networks which aimed to connect startups like yours with angel investors. You applied to pitch at a couple of events and were invited by one network to interview with them in person.

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Episode 8

Employees and Consultants

Having completed the raise, you, Sarah and Chris have decided that you need more help in developing and marketing the product. You are looking to create two new roles in the business - the first is a Software Developer to support Sarah’s work and the second is a Head of Marketing.

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Episode 9

R&D tax relief

Knowledge of the UK tax system is valuable for any UK business owner, start-ups can dramatically improve their chances of success by ensuring they claim the various tax reliefs and incentives available.

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Episode 10

Obtaining a Sponsor License

Following their seed raise and having secured some additional capital through an R&D repayment claim KNow Wear Limited have identified some overseas talent that they would like to hire to help to expand the business.

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Episode 11

Directors' Duties

As a director you owe duties to the company and in certain circumstances to the company’s shareholders, employees and creditors. Breaching these duties can lead to civil or criminal penalties and so you have asked the company’s lawyers to remind you of the duties that apply to you as a director.

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We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.

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