How to grow a tech company and protect your idea…
In our major feature, TECH Centre Stage published inside the October issue of Business & Innovation Magazine, our experienced legal and finance experts discuss how technology start-ups and scale-ups can make a success of their business.
Sarah Kenshall is a partner specialising in fintech, technology and intellectual property at BPE Solicitors.
David Clift is a partner in the Innovation and Technology team at Hazlewoods Business Advisers and Chartered Accountants. He has a particular interest and expertise in providing R&D and Patent Box advice to IP-rich companies.
The importance of good protection… Should you talk about your idea or not?
It’s a conundrum for entrepreneurs who have come up with a new idea and need support and investment to make it a reality. Talking about the idea to anyone at all could prevent you protecting it because by doing so you’ve put it in the public domain. Not talking could mean the people you need to help grow the business may not get to hear about it.
Sarah Kenshall at BPE Solicitors said: “Since the key asset of any technology company is the strength of their intellectual property (IP) rights, they can only talk about their ideas in general terms for fear of invalidating these rights. Once ideas
are out there with no protection, there’s no going back.”
For example, in the world of programming, while copyright subsists in the expression of the idea, there is nothing to stop others expressing the idea in another manner. Equally, in the world of algorithms, absent patent protection – how the algorithm is structured and calibrated, needs to be kept confi dential otherwise anyone can use the information.
David Clift at Hazlewoods added: “A big issue with early-stage companies is patenting. Some smaller companies don’t understand what patentable ideas they have and how they should protect them. They can also be reluctant to take advice because they think it’s going to be expensive to safeguard a patentable idea formally.”
But it could be a lot more costly not to invest in protecting your idea early on, and even scupper your chances of taking an idea to market at all.
David said: “Various examinations have identified that on average, around 80 per cent of the value of a business relates to its intangible assets. Clearly this figure is likely to be higher for a technology or innovation company. “As this intangible value often doesn’t get reported anywhere, it’s difficult for investors or lenders to see the value in a company if it’s not highlighted. “An entrepreneur should consider identifying and formalising their intangible assets, so investors can spot them more easily and appreciate their potential value.”
Other companies at the formative stage will realise they need protection and download a non-disclosure agreement (NDA) from the internet. But many are not worth the paper they’re written on, warn Sarah and David.
Sarah said: “Template NDAs downloaded from the internet seldom cover key things which need to be protected. There are three key elements to an NDA: they should identify the confidential information in question, they should control any onward disclosure of the information, and they should control the purposes for which the information is used. “Three simple things. But many template NDAs fail to cover these properly.”
David added: “Entrepreneurs can be having conversations with potential investors or other experts thinking they are protected. The reality is they are potentially giving away confidential information.” And that’s a particular problem for technology companies.
“Tech companies are usually high growth,” said Sarah. “They will be knowledge-based businesses and their IP is their crown jewels, it’s what powers them.”
What is the difference between an ‘IP asset’, which is the actual work created, and an ‘IP right’ which is the means by which that work can be legally protected?
“The distinction is often lost in practice and can lead to confused thinking,” said Sarah. “To a certain extent, many technology companies already have the benefit of automatically occurring IP rights,” she added.
“Much of the coding creating the infrastructure of our new digital world is already protected by copyright. If you have created, say, a specific set of software functionalities you own the copyright.”
But that might not be the case for one of the largest growth areas in the technology sector: algorithm development.
“You may be able to get patents for an algorithm, but it’s not straightforward,” explained Sarah.
“And there is societal benefit to protecting algorithms through patent protection, where possible, because you can then disclose how they work which in turn helps the whole innovation process. If you can’t get patent protection for algorithms, and as I said it is complicated, you should not disclose their workings. This will make it tricky when you are trying to interest early-stage investors. A properly formed NDA will be crucial here.”
The importance of networking
While many entrepreneurs might think their idea is ground-breaking, it might just be that someone’s got there before them. So if you think your idea might be patentable, it is worth consulting a patent attorney.
“An early conversation with a good patent attorney could throw up information an entrepreneur might not be aware of,” said David. “Perhaps a direct competitor is doing the same thing, or they might find there is already a very similar product in the market.”
Advice and perspective from others in the innovation space can also help here. While customers and other business partners may be prepared to settle for contractual statements on the status of IP rights, potential investors will want to look at the assets and reassure themselves that the IP rights do belong to the company before they make an investment.
Sarah said: “There are lots of innovation networks, including early-stage ones such as SETsquared. Investors participate because they like to keep an eye on what’s happening so they can get in early if they want to invest.”
SETsquared is a collaboration between five research-led UK universities – Bath, Bristol, Exeter, Southampton and Surrey. It offers support programmes to help turn ideas into businesses. There are many similar organisations across the region.
Sarah has been a SETsquared mentor and David regularly attends SETsquared meetings, along with other professionals and investors. David said: “It may be an investor is not ready to invest but is happy to offer advice to young companies. Business professionals such as Sarah and I are happy to do the same.”
Sarah agreed: “In the UK we have a strong business network and are good at facilitating discussions through them.”
And the relatively recent phenomenon of certain sectors clustering in key locations (such as cyber in Gloucestershire and Worcestershire, medtech and pharmatech in Oxfordshire, infotec in the Thames Valley, automotive in Warwickshire and fintech, creative and robotics in Bristol), help a young company seeking support because potential investors already understand a particular area of technology.
Raising the finance
Many early-stage companies will self-finance, but when they begin looking for funding, tapping into the right networks can offer them access to interested and engaged investors.
Sarah advises young companies to be prepared: “Make sure as you go along you are ahead of the game. Before you go looking for finance, make sure your IP assets are properly protected. “If you don’t, it can make the investment process much longer, or scupper it completely. Ask a professional’s advice. At the early stages, this is not going to be expensive.”
David added: “Timing is also key for companies seeking investment. Investors will ask where the company sees its potential markets and whether their idea is protected in that market or geography. “Again, when you’re looking for finance and investment, it all goes back to protecting your IP early.”
Sarah said: “If you’re looking at a global strategy, you need to ensure you have secured the necessary IP rights in all the relevant jurisdictions, and timing is crucial for that too, particularly as regards patents and trademarks.”
Many entrepreneurs start by seeking funding from friends and family. It can allow them time to develop and de-risk their innovation without investors breathing down their neck or demanding too much equity in the business. However, if not accepting external funding early means you could miss a market opportunity, sometimes it’s worthwhile giving away a bit more to get out there early.
Later in a company’s development there are government tax incentive schemes tailored specifically to innovation and technology companies, such as the UK’s successful R&D tax incentives and Patent Box.
R&D tax credits help companies with the costs of their innovation and development and are now fairly well understood, although they could be about to experience an overhaul after a recent government consultation exercise is completed. The Patent Box tax incentive, however, is still not very well-known but can be immensely valuable.
Patent Box helps companies once they’ve got beyond the development stage and are starting to make money from their patented technology. It is intended to provide further encouragement for innovative companies to stay in the UK by allowing them to reduce the amount of UK tax they pay on their worldwide profits from exploiting the patented IP. Clearly, with a lower UK tax liability, the company has more to reinvest into further development.
David said: “Some big winners from Patent Box are software tech companies because the bulk of their development cost is often incurred upfront. Once they’ve developed their software, they often have a relatively low-cost base which works well for Patent Box. These tax incentives mean they pay closer to 10 per cent instead of 19 per cent in corporation tax.”
And that’s attractive to investors who want to put their money into a company without a big tax burden.
Of course, it’s not just investment a company needs, although that’s key in the early stages. Right from the beginning the business must plan how it’s going to take its product to market.
Sarah said: “Companies may have a couple of rounds of investment under their belt but are not yet profit making. Sometimes they get so involved in building the tech, they forget they’ve got to sell it. My advice is, don’t wait until your product is totally ready, you need to build in sales from the beginning. Get out there.”
For more information on the legal and finanial aspects of protecting and growing your tech business contact Sarah or David.
READ the TECH Centre Stage feature here