Startup Constitution by Nordic Law – How to Protect the Business Idea of a Startup

    A while back, the founders of a rapidly growing Finnish startup within digital marketing came to see us at Nordic Law. The founders had been very focused on the development of the startup’s core business idea and model, which also had resulted in a blooming growth. However, with growth comes often interested competitors, which also was the case with our client. As the development of the business had been very rapid, our client had not had time to focus on the protecting of the essential intellectual property rights. That had resulted in a competitor who took advantage of a business model and trademark created by our client. All the hard work of our client was exploited by a direct competitor. Fortunately, the matter could be solved with negotiations with the competitor, but the case shows the importance of the topic of this blog post.

    We have during the years encountered several entrepreneurs, who have been for a long time developing a business idea they hope to be unique in regards to the business model, logo and slogans. When the product or the service concept finally meets the high expectations of the entrepreneur, it is time to start to think about the correct measures that need to be taken. As a founder, you want to make sure that the core business idea is duly protected when you are ready to launch. Yes, that’s right folks, we are talking about the oh-so crucial IPR-aspects that are there to protect your business idea from being unlawfully exploited. As we all know, the startup world is full of new ideas that also attract competitors, which also means that the protecting of IP should be on every startup’s agenda.

    Even though startup entrepreneurs are more and more aware of the essential IPR-aspects and the protection of relevant IP, below we will discuss certain key areas that are essential to all you startup entrepreneurs. When considering that the initial development speed of a startup can be quite rapid, as the case above shows, certain key IPR-aspects may be forgotten a la “we will have time later on to think about the protection of the IPRs, let’s just now get the product on the market”. Such thinking should always be avoided as often the most valuable property of a startup are the IPRs.

    How to protect your invention

    Firstly, if the business idea of a startup is evolving around a certain invention, the first order of business should be to investigate how the invention can be protected. The most common alternatives to protect an invention are either a patent or a utility patent that grant the invention itself IP protection. However – oh no, here comes the legal mumbo jumbo – startups should keep in mind that merely ideas cannot be protected. In order to make sure that a patent application is approved, the invention should be of technical nature and it should solve some technical issue. For all you software wizards out there – a computer software as such cannot be protected with a patent, but inventions relating to computer software may be protected with a patent. Drawing the line between an invention that can be protected versus an invention that cannot be protected can in many cases prove to be quite challenging and time-consuming. That being said, if your startup is thinking about filing a patent application, it is always recommendable that you either consult a lawyer experienced within patent legislation or go straightway to a IPR-house.

    If your startup has got its first funding round around the corner, you should also prepare a so called FTO (Freedom-To-Operate). The FTO is a document stating that the startup’s product and/or service does not violate on any patents (or any other registered IPRs). Especially if the funding round is aimed towards professional investors, such as business angels and VCs, a well-prepared FTO is a must.

    Patent vs copyright

    Secondly, as we have assisted several tech startups, we have noticed that startups rarely create inventions that can be protected with patents. The current trend has instead been evolving around various computer software, mobile applications and virtual platforms that as such cannot be protected with patents. Even though a patent is not possible, the business concepts should in some manner be protected in order to prohibit unlawful exploitation by competitors. The primary alternative in that situation is the classic copyright. Copyright is a legal right that grants the creator of an original work exclusive rights for its use and distribution meaning that only the creator of a specific work has got the right to use it. For example, a copyright to a computer software may – as any other IPR – be licenced and commercialized creating more revenue for the startup owning the copyright.

    Protect your designs

    Thirdly, if the startup’s business operations evolve around a tangible product that cannot be protected with a patent, another alternative is to protect the product’s design through a protection of design. In that situation the startup has got the exclusive right to use a certain design. It is essential to keep in mind that if the startup has invested both money and time in the design of a product, the startup should also register the design.

    Protection of design is generally granted if the design of a product is new and has individual character. The design should also be a result of creative work meaning basically that you cannot receive protection to a design consisting merely of a square. As an example of a very famous product with protection of design is the original Coca-Cola glass bottle.

    Register your trademark

    Fourthly, it is also essential that a startup protects the vital logos and slogans that are used regarding the business operations. Said types of IP can be protected with the help of trademarks. If a trademark is granted, the startup has got the exclusive right to use the trademark in its business operations. Trademarks can be registered nationally and internationally depending on the desired level of protection. Startups should keep in mind that certain countries, such as the USA and UK, require that if a trademark is granted, the trademark must also be used in the country in question. That means that the startup cannot register a trademark without having an intention to use it in its business operations – for example, in the USA trademark applicants are obligated to declare that they will use the trademark in commerce. If not complied with, a penalty of perjury is possible.

    In addition to the key aspects discussed above, it is always recommendable that startup entrepreneurs limit their liability by establishing a limited liability company (LLC). All the essential IPRs of the business operations may be transferred to the LLC. In that situation, startup entrepreneurs can make sure that the possible liabilities are restricted to the company and all IPRs are the property of the company.

    It is also very important for investors that the startup’s essential IPRs are the sole property of the startup as the startup as a company is the target of the investments. This fact should be kept in mind as of the first funding rounds.

    Lastly, with a clear IPR-strategy that takes into account all the aspects we have discussed above, your startup can concentrate solely on the business operations knowing that the essential IPRs to the business are identified and protected. If you would like know more of a well-functioning IPR-strategy, we would be glad to sit down and have a discussion with you about relevant IPR-aspects of your startup.

    The author of this blog post is Jon Hautamäki, a partner at Nordic Law.