From Mike Drzal:
For entrepreneurs, raising capital is almost never easy. That said, a systematic approach will greatly enhance the entrepreneur’s prospects for success. The first step isn’t to form a legal entity but to vet the intellectual property on which the company will be built.
It’s important to determine that the company being considered will have all necessary IP assigned or licensed to it. All necessary IP must be accounted for. If consultants have been involved, IP assignments are a must. If a patent application is pending, the strength of the claims and the likelihood of issuance need to be assessed.
Assuming a patent is likely to issue and the claims appear solid, freedom to operate should be assessed in order to ensure that the entrepreneur is working with a complete IP package that will allow him/her to deploy the subject matter into the marketplace. This step should not be skipped even if a patent has issued, especially if the patent is being licensed. The entrepreneur should not assume that just because a patent has issued it is either sufficient or defensible.
Patents licensed from universities/tech transfer offices have special considerations associated with them, including representations, warranties and indemnities. A recent Supreme Court case underscores the importance of investigating whether patents being licensed from universities have been properly assigned.
If there is no patent involved, the IP “fence” may be a trade secret or know-how. Either can be fine depending on the circumstances, but again no assumptions should be made – choosing the right IP strategy from the beginning will pay off.
When thinking about it, putting IP first makes complete sense – why spend the time and money to form a legal entity and begin assembling a team to commercialize IP if the IP is somehow lacking or defective? It will all come out in investor due diligence anyway, so finding out early is much wiser. You can always get more money, but you can’t get more time.
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Mike Drzal is a shareholder at LeClairRyan and serves as chair of the Firm’s Venture Capital practice. Mike currently serves as general counsel to a number of start-up and emerging companies, including medical device, bioinformatics, pharmaceutical, diagnostics, manufacturing and distribution, alternative energy, medical information technology, internet, and high-tech research and development companies. He also serves as counsel to a growing angel investor network and serves as co-chair of the Roanoke/Blacksburg Regional Innovation Blueprint and Action Plan initiative of the Roanoke-Blacksburg Technology Council of Virginia.
Mike Drzal is a client columnist for Handshake Media, Incorporated, the parent company of Handshake 2.0.