By Brian Mack and Anna Quinn
Editor’s Note: The information contained in this article is provided for educational purposes only and does not constitute legal advice nor result in an attorney-client relationship with the reader. Any questions about how this information might affect your particular situation should be addressed to an attorney.
You’ve come up with that “million-dollar idea,” and maybe even have a working prototype, but the road is long (pun intended) to get from prototype to production. There are a number of things to think about. In the first article, we presented some considerations for taking an idea from conception to prototype while maintaining intellectual property rights in the invention. In this second article in this series, we discuss several items to think about as you work to commercialize your invention.
Commercializing an invention requires an extreme amount of patience and persistence. The hurdles are many, and the expense is great. Consequently, it is common for inventors to do one of two things: give up on their idea (which we don’t recommend), or gather a team that will help take your idea to the next level. Each team member serves a particular purpose, having the skills necessary to develop the product (e.g., knowledge about product design, connections with industry professionals, etc.), market the product, or run the business. Your team may additionally include investors, which may be instrumental in helping fund the process. Gathering the right team will help you effectively navigate your way to commercial success.
As an inventor, you will likely have the urge to share your invention with everyone you meet. While this may certainly bring awareness to your invention, there’s one very important thing to keep in mind. Without patent protection, there’s nothing to dissuade a third party from taking the invention and making and/or selling it himself.
The best way to protect your invention from third parties is to file a patent application before you disclose any details of the invention. Additionally, the patent laws set forth a strict one-year bar—once you’ve publicly disclosed your invention, you have one year to file for patent protection. If you’re outside that one year, then the invention is considered to be dedicated to the public.
How do you talk to others about your invention without running afoul of the patent laws and in such a way as to prevent someone taking the invention as their own? The simplest and most effective way is to keep the invention to yourself, disclosing it only to those who need to know about the invention (e.g., your closest team members) in order for you to move forward. If and when you do disclose your invention, consider entering into a non-disclosure agreement with the individual or company before providing any details. A non-disclosure agreement can be as simple as it sounds—an agreement not to disclose information. By entering into a non-disclosure agreement, the other party agrees that it will hear your information and will keep it secret for a predetermined period of time.
Usually, signing a non-disclosure agreement will be enough of a deterrent that the contracting party will not disclose any confidential information. But even if non-disclosure agreements are often effective at keeping your invention secret, it’s a contract, and there is no recourse against the other party who might disclose the confidential information unless you sue for breach of contract. Therefore, we also recommend that, if possible, the inventor secure a filing date at the Patent Office by filing a patent application. In the third article in the series, we will discuss the process for securing patent protection. By securing a filing date, you can ensure that your rights are protected, even in the event of a rogue team member.
While investors are willing to provide an amount of funds for an interest in the invention or your company, the terms by which an investor may agree to fund the commercialization of your invention are absolutely negotiable. There is no one right way to negotiate an investment deal. Whatever the terms of the deal may be, the one thing that is not negotiable is putting the agreement in writing. The agreement should set forth exactly what is expected of each party to the deal so that there are no surprises later.
For example, if you, as the inventor, are going to be solely responsible for determining the direction of the patent, that should be in writing. Or, if the investor will have some involvement in the patenting process, for example, by providing some sort of consultant role, that should also be in writing. It is often great to have investors on your team, but make sure that there’s an agreement, signed by both parties, that defines the scope of the relationship. It is also advisable to have agreements with each member of the team.
An important consideration is whether you proceed through the patent process as an individual, or should you set up a business? You may not be surprised, but there’s no single right way to proceed. Often it is a good idea to set up a business.
However, when doing so, you may want to consider if you will have investors or other members on your team? How much say do you want the team members to have? Will you have employees? Is your product going to be sold on a national scale?
Do you have a desire to protect your personal assets in the event that something goes awry? These are merely a few questions to ponder as you consider whether setting up a business is right for you, and then, what corporate structure best serves your interests.
If you anticipate having other team members, investors, or employees, you may consider setting up a business. Usually it will be easier for you to give away a share in a company (e.g., to an investor) rather than an interest in the patent itself. This is especially true given that the investor may come on board before a patent is actually granted. Therefore, the investor may want some ownership in the company. If there’s ever an issue with the product, you may wish to have a company set up that takes on any liability, therefore protecting your personal assets. Furthermore, establishing a company may also provide certain tax benefits.
Which type of corporate structure is right for you? There are a number of different corporate structures, each having its own benefits. Corporations and limited liability companies (LLCs) are two types of corporate structures that are commonly used and are well known, and that we briefly highlight here. Corporations are very formal corporate entities. To set up a corporation, articles of incorporation are filed with the state. Corporation bylaws set out the governing details of the corporation, identifying the directors and officers and their respective duties. Corporations exist for shareholders. In the event that the corporation is sued for any reason, each shareholder is liable, usually limited to his or her original investment in the corporation.
Limited liability companies are somewhat less formal. A limited liability company requires articles of organization, which are filed with the state. An operating agreement sets forth the members’ rights and duties. The limited liability company may be attractive for inventors and members of their team, because each member may have a say in the company, as set forth in the operating agreement, without having to answer to shareholders. The inventor may bring in investors and other team members, and define each member’s role in the LLC through the operating agreement. Members of the LLC, if properly formed, cannot be held liable for issues arising out of the LLC’s business.
We recommend speaking to your attorney about which business entity is right for you. Once the corporate structure is set up, any intellectual property may be assigned to the company, and the company becomes the de facto owner. In the final article of the series, we talk about securing intellectual property, including patents and trademarks, to add value to your business.
Brian Mack and Anna Quinn are registered patent attorneys with Lathrop & Gage LLP in Overland Park, Kansas. Their work includes counseling clients on various intellectual property issues including drafting and prosecuting patent applications, trademark applications, licensing patents, enforcing patents, and avoiding patent infringement. Their client base spans different technologies and industries including general mechanical, construction equipment, power generation, aerospace, energy, biological, and chemical industries. For further information, contact Mack at firstname.lastname@example.org or Quinn at email@example.com, or visit www.lathropgage.com.