TAKEAWAY: Startups should have an intellectual property plan early, as patents can have a large effect on valuation of the company.

Startup founders come from a wide variety of backgrounds. Some are coders with a great idea, and some are business folks who know a good idea when they see it. Some come from industry, and some are out of academia. As a result, there are a wide variety of views about the patent system, and more than a few misconceptions. Startups are often constrained on resources, particularly at the beginning, and as a result can be tempted to avoid incurring the expense of seeking patent protection. This approach can forgo much of the potential value of the company.

Capital Funding

Patents are usually not essential for fundraising, but having early, broad patents in an innovative area can make fundraising easier. Even patent pending status can help. From the first moment a startup files a (potentially inexpensive) U.S. provisional patent application covering a product, the company can claim “patent pending” status for that product.

Not only can seeking patent rights help with fundraising, it also may frustrate that ability for competitors to attract investment.

Freedom to operate

If a startup enters a space with competitors that have patent portfolios, those competitors may demand steep licensing fees or threaten a patent infringement lawsuit. A patent portfolio can serve as a deterrent to competitors. With a few broad patents in hand, a start up may be able to ward of competitors worried about the risk and cost of countersuit.

Another aspect to freedom to operate is avoiding the risk of a competitor winning the race to patent new technologies. Keeping certain ideas a trade secret is often appropriate; sometimes “secret sauce” practices are not patent eligible. But the patent system awards rights to the first applicant to publicly disclose and explain a new invention, even if other companies were long practicing the technique in secret.

Loss of rights

In most countries, once a patentable concept is publicly disclosed, the ability to obtain a patent on that technology is immediately lost. In the United States, a public disclosure by a company starts a one-year clock for that company, after which the potential to seek patent rights for the subject matter disclosed is lost. Why should this matter? A startup might plan to build a patent portfolio later once revenue streams are more reliable. But for many startups, the earliest applications are the most valuable. The first few patent filings often claim fundamental aspects of the technology, while later patent families describe improvements and fill in gaps. Losing rights to the key fundamentals can diminish the long term value of the company.

In sum, as tempting as it may be for a startup to delay patent strategy when cash is tight, early days can be the most critical time to seek patent protection.