Legal Buzz is an opportunity for students to have their legal questions answered by lawyers from Troutman Sanders. It is free to attend all Legal Buzz sessions.
Below are a few Frequently Asked Legal Questions for Student Startups.
Being smart about your IP
Q: How can I talk to people about my ideas?
A: First, you and your team members should make sure you are only talking to trustworthy advisors and investors to reduce possible threats to privacy. You can also use non-disclosure agreements to protect your ideas. If someone files a patent application with your ideas, it is much easier to have a case if you used a non-disclosure agreement. You can avoid IP theft by filing for a patent early. From a business perspective, you might want to be open about your ideas to launch up your idea within a community; however, know that sharing your ideas puts you at risk, so be smart about what you share.
Q: How can I best document conversations and agreements?
A: First, know that you cannot record a conversation you are not a part of, and that you cannot record a conversation unless the other party is aware that you are recording. In addition to recording conversations, you can use written documentation. All agreements should be physically documented.
Q: How does possessing IP change for graduate students?
A: IP that you develop as a graduate student must be developed at home. Inventions will be assigned to the university if you are a graduate student, and your work relates to your course of study. The university has rights to pursue patents with your IP while you are still involved in launching your startup.
Forming your company
Q: How can I bring on new members (technical members, partners, etc) of my team?
A: The most important thing you can do is ensuring you have accurate and detailed agreements in place, such as employee, workplace, and ownership contracts. If you do not set up a contract with a software engineer, the software engineer is the owner of your company’s code, according to copyright laws. Make sure you outline things such as share percentages and voting rights in executive decisions in these agreements. If you are bringing on a software engineer, utilize a non-disclosure agreement before you share any details about the company for the hiring process. Note that you might not need a software engineer if you have some technical background. You may simply want someone to help you work through problems. Ensure you are looking for people with similar passions, and the CREATE-X community is a great place to start looking for team members!
Q: What type of company can I form?
A: You will most likely form an LLC, or a limited liability company, to include a small team that is in charge of the company. It is much easier to file as an LLC as early in the startup process as possible, while relationships among team members are fresh. You can always chose to change the filing of your company later. When considering how to file, consider what investors are looking for. For students interested in service based companies, you will have additional legal costs that you will need to look into.
Q: When should I start my company?
A: The best way to protect yourself from liabilities is to form a corporation early-on, so you are not personally held liable for any lawsuits. It is always a good idea to start your company early. If you have a working prototype already, you definitely want to form a legal entity that can place orders, receive money, and perform legal duties.
Applying for the patent
Q: What are early steps I can take before filing for my patent?
A: There are a number of things you can do to ease the patent process in the future: preserve capital, focus on domestic patents and do not chase manufacturing abroad, be critical with cash flow, do not publically disclose the potential patent. Additionally, you can do some self-searching on Google Patents to avoid extra costs of hiring a patent searcher. Make sure that there is nothing exactly like your device/software already in existence. Particularly pay attention to software licenses for any software packages and functions you have utilized. Be careful of utilizing open-source components!
Q. Where do I apply for a patent?
A. The USPTO’s website (United States Patent and Trademark Office).
Q: How do I file for a patent?
A: As a startup, you should file claims overtime in order to say you are patent-pending. You also don’t need to know what part of your device would need a patent, but it is a good idea to describe your device and file a claim on all aspects. Just make sure you have done thorough research on competing devices and companies to check for already existing patents. Steps to obtaining a patent are:
- File a provisional patent application, then receive a one-year grace period to file a non-provisional application. Everything in your non-provisional application should be supported by your provisional patent application, but does not have to be similar.
- The patent office will essentially look at all patents prior to patent date filing.
- You will receive an office action after payment of lawyer fees, non-provisional patent application fees, etc.
- You will receive a final office action discussing any patents similar to the filed patent.
- The process can repeat with office action for more rounds. After numerous rounds, notice of allowance will come and the patent will be given. Patent issue and lawyer fees will be paid around this time period.
Q: Will I need a provisional patent for my physical device? How is it protected against others?
A: Applying for a provisional patent is easy, and you can find the application online. Explain the details of your product but not too specific so that you cover a broad idea. If a professor/person is solely giving lab space (not helping in your project), then the patent should be yours.
Software-specific patent information
Q: What kind of licenses exist to protect code?
A: Software is difficult to protect, but it is not impossible. You want coverage on the claim, so you must provide details on the software without being too specific that it becomes too narrow to protect any type of code. You want to be broad, so you can receive a patent from the patent office.
Q: If software is hard to protect, why do I need a patent?
A: The optical value of software patents is not high, but it is not worthless. The patents will give a better indication of the sophistication of the device. If your patent is purely for business purposes, then the value of patent decreases, but if it is for a technical purpose, then you would benefit from possessing the patent.
Medical-specific patent information
Q: I want to get into the pharmaceutical or medical device industry. Are there any additional legal considerations?
A: Pharmaceuticals make the most sense to patent as they are being used for a long period of time. For any medical industry, there are regulatory issues, but you will navigate any issues in the process. The vast majority of medical device clients are doctors. If you are a first-year student, the odds of definitively choosing a medical device startup in the first year of your degree program is difficult, so keep an open outlook as you venture into your field in more depth.
Q: If I am an international company, how can I sell to the United States?
A: Your product will most likely be taxed, but the tax may be at the consumer’s expense.
Q: Does a domestic patent protect from international infringement?
A: If the patent covers the part of the device that the international company copies in their own product, you can sue them for infringement.
Funding your company and handling equity
Q: Can you collect funding before you have formed as an LLC?
A: Taking capital from credited investors is key. The cheapest way to launch a fund is using a credited investor, so it minimizes the number of “hoops” to jump through. If you are creating prototype or ready for market, you should begin trying to find funding early.
Q: What happens if you never raise money with your fund or if your company goes bankrupt?
A: In startups, you will either sell part or all of your company. If you go bankrupt, your investment in your company is gone, but you as the owner will be financially okay. Your reputation may be affecte3d when looking for future investments.
Q: Should I look into splitting equity between founders?
A: Wait until the company formation has further developed until you have built a larger team with a matured idea. Be cautious of who you invite into a long-term position.