BUSINESS PLANS

Patents as an Incentive

Securing a patent offers an incentive to both inventors and investors.
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Sophisticated investors look for a sustainable competitive advantage when evaluating a business as a potential investment. Most of the time, this involves the business having the exclusive right to some form of intellectual property (IP).

In the marketplace when a competitive advantage starts to make a difference, competitors tend to "adapt and adopt" to the fullest extent permitted by law. In other words, they will copy whatever it is that makes your product special in the marketplace, unless you have erected the appropriate legal barriers. You might have the best product in the world, but from the perspective of a potential investor, if the product can be copied as soon as it "makes a market," it is typically not sufficient to make it likely that the business will meet the investor's expectations or return on investment.

As a general proposition, any product that is not covered by the claim of a patent is fair game for the competition, (so long as there are no contractual obligations or likelihood of confusion as to the source or origin of the respective product). And a patent is the only mechanism for protecting against an independent development of an invention. So sophisticated investors tend to consider a patent necessary to adequately protect an investment in research and development.

In addition a patent grant also gives you credibility -- an independent party (the patent office) has, in effect, legitimized the technology and is evidence of expertise in the technological area of the invention. While considered an intangible asset from a tax perspective, a patent is in fact a "demonstrative" asset that can be a significant aid in obtaining Other People's Money (OPM).

However, not all patents are created equal. There are specific requirements that must be met with respect to the level of detail with which the invention is described in the patents, and the scope of protection provided by the patent is defined by a set of formal "claims." The coverage of the claims (which are interpreted in part by the description of the invention) determines how effective the patent is as a protection mechanism.

Do you need a patent attorney to prepare a patent application? While the law permits an inventor to file his or her own patent application, you would be crazy to do so. From the perspective of a sophisticated investor, an inventor-prepared patent is typically not only viewed as providing dubious protection, but indicates a lack of sophistication in the management of the venture and weighs against investment. A patent application is a very technical document -- both from a technological and legal perspective. The value of the patent is a direct function of how the patent is interpreted. The special expertise of an experienced patent attorney is crucial to ensuring that you get appropriate protection.

Preparing the patent application can be expensive -- typically anywhere from $5,000-$25,000. The cost is a function of two primary factors -- the complexity (technological and legal) of the invention and the materials provided to the patent attorney. The materials should be complete and in a form easy for the patent attorney to work with. You can minimize the cost by doing your homework beforehand. You can get a handle on relevant prior art through Internet searching (you can access a database including the full-text of patents going back to 1976 and full-page images of all patents since 1790 at www.USPTO.gov ). And patent disclosure forms are available over the Internet to help compile and organize information for a patent attorney. While patent protection may be relatively expensive, the real question is not how much patent protection will cost you -- the real question is how much it will cost you if you do not obtain appropriate protection. If patent protection is available it can be worth its weight in investor's gold. It is worth taking the trouble and going to the expense to do it right.

Last updated: Jun 1, 2007




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