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.

You're invited to read more from Mike Drzal on Handshake 2.0.

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.

How does a start-up founder choose an intellectual property attorney?

I asked Rebecca Conner, an attorney with LeClairRyan who specializes in IP for emerging companies, "What are three questions a technology company founder should ask a prospective IP attorney to find out whether or not the company and the IP attorney are a good fit?"

Rebecca Conner kindly replied:

1.  Does the firm have subject matter experts in the company's relevant industry (e.g. chemistry, life sciences, IT, opto-electronics, biotech, etc.)? 

In order to adequately protect IP, a company founder needs access to an IP attorney who is an expert in the company's technology vertical market.  If the IP attorney cannot understand the invention, he/she cannot properly protect the invention.  
 
2.  Does the firm have experts in all areas of IP protection? 

If the firm does not have an expert in each area of IP protection, the firm will not be able to help the company protect all aspects of its invention.  For example, if the invention consists of proprietary hardware bundled with proprietary software, all 4 areas of IP protection - patents, copyrights, trademarks, trade secrets - should be considered.  Attorneys in each IP area need to be able to work together to protect the invention holistically.  
 
3.  Does the firm have experts that can assist in other areas of business (e.g. raising capital and financing, general corporate work, tax issues)? 

In order to adequately protect IP, a company's IP attorney needs to have a firm understanding of all aspects of the company's business.  If the firm provides all of the legal work necessary for the operation and growth of the business, the company's IP will be consistently evaluated to ensure that it is adequately protected. 

For example, if a company founder is in the process of raising capital, the company's corporate attorney may need to work with company's IP attorney to better understand the business in order to identify suitable investors or sources of financing.  Or, if the corporate attorney is helping a founder set up a distributorship in another nation, your corporate attorney needs to work with your IP attorney to ensure that your IP protection extends to operations in that nation.  These collaborative processes occur most effectively and cost-efficiently when all of legal work is being provided by one firm.

Thank you very much, Rebecca!

Rebecca B. Conner, attorney at law with LeClairRyan, focuses her practice on emerging growth companies in a variety of practice areas including entity selection and formation, mergers and acquisitions, intellectual property matters, and a variety of financing transactions, including, but not limited to, venture capital transactions. Ms. Conner also regularly advises clients concerning issues relating to technology contracts.

You're invited to read more on the subject of intellectual property on Handshake 2.0.

Mike Drzal, attorney with LeClairRyan, introduced a panel discussion, The Current Financial Market and Its Impact on Innovation in the NewVa Region, arranged by the NewVa Corridor Technology Council, NCTC, on November 13, 2008.

Mr. Drzal was kind enough to share an outline of his comments with Handshake 2.0:

LeClairRyan is an entrepreneurial law firm, representing clients in matters of corporate law and high-stakes litigation. We are a national law firm, which gives us a unique perspective on our local financial market.

I head LeClairRyan's Technology Company and Venture Capital Practice, consisting of 14 attorneys in 5 different offices:  Blacksburg, Roanoke, Richmond, Virginia Beach and Newark, New Jersey.

Here is our take on what is happening in the emerging company arena.  This is a venture perspective as opposed to the banking perspective you will hear from our panelists.

1. Deals are still getting done, BUT they are taking longer and deal terms are harsher.

2. Equity financing sources are being more selective.  It is a buyer's market.

3. Valuations are coming down and we are seeing down rounds.

4. A new rule of thumb is that a company needs to raise enough to get to cash flow neutral.  There is no guarantee of follow on rounds.

5. The angel market is alive and well.  For example, NERD energy and focus drink funding was offered on the spot at last week's Annual Business Forum in Charlottesville.

6. Cash is king.

Here is what our firm, LeClairRyan, is doing:

We are viewing this as a great opportunity to expand and pick up new talent. We just hired a patent attorney from a large national firm and are looking at this situation as a chance to build in that area and others.

We are doubling our marketing efforts.

This, too, will pass and those who seize the day will emerge the winners on the other side of this downturn.

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Thank you very much, Mike Drzal.

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The panel for The Current Financial Market and Its Impact on Innovation in the NewVa Region, arranged by the NewVa Corridor Technology Council, NCTC, on November 13, 2008, consisted of Ed Lawhorn, SunTrust Bank, Allan Funk, Branch Banking & Trust, BB & T, Brad Denardo, National Bank of Blacksburg, and Karen Turner, StellarOne Bank.