Overview of legal, accounting, valuation and pracical considerations on intellectual property for startups

1. Perspectives on Intellectual Property
Presented by: Sunny Handa
Mark MacLeod
Sylvain Guindon
Sylvain Caron
November 3, 2010

2. AGENDA
• Opening remarks by Matt Harrison, Senior Manager, BDO
• The legal perspective by Dr. Sunny Handa
• The operational perspective by Mark MacLeod
• Short break
• The tax perspective by Sylvain Guidon
• The valuation perspective by Sylvain Caron
• Questions for the panelists
• Drinks and hors d’œuvres

3. THE LEGAL PERSPECTIVE BY
DR. SUNNY HANDA

4. /4
Outline
1. Introduction
2. Intellectual property laws
3. Types of intellectual property
4. Developing, commercializing, and transferring
intellectual property
5. Specific technologies
6. Intellectual property concerns when doing
business

5. /5
Introduction
• Intellectual property (IP) refers to creations of
the mind including inventions, literary and artistic
works, symbols, names, images, and designs
used in commerce.
• Intellectual property laws generally grant owners
are granted certain exclusive rights to the
intangible assets in question.
• Conceptually, IP is divided into two categories:
– Copyright
– Industrial property

6. /6
Examples of types of Intellectual
Property
• Copyright
• Patent
• Trademarks
• Trade secrets
• Industrial designs
• Plant breeders’ rights
• Domain names
• Semiconductor chip protection/ integrated circuit
topography rights

7. /7
Intellectual Property Laws
• Nationally based
– In Canada: Copyright Act, Trade-Marks Act, Patent Act, etc.
• Harmonizing Conventions and Treaties
– Canada is signatory to: Paris Convention, Berne Convention,
TRIPS Agreement (Agreement on Trade-Related Aspects of
Intellectual Property Rights), Universal Copyright Convention,
Rome Convention, General Agreement on Tariffs and Trade,
NAFTA, WIPO Copyright Treaty, WIPO Performances and
Phonograms Treaty.
• Other legal fields that also touch upon IP protection
issues
– Tort, competition law, criminal law, contract law.

8. /8
IP Laws in Canada
• Federal Law:
– Regulates patents, trade-marks, copyright and moral rights,
industrial designs, topography rights and plant breeders’ rights.
– With only a few exceptions, federal law governs intellectual
property in Canada.
• Provincial Law:
– Common Law: regulates aspects of IP such as passing off,
personality rights and confidential information.
– Statutes: personality rights, trade names and contracts related to
IP, such as transfers, licences and security interests.
• Private Law:
– Domain names (to a degree).

9. /9
Copyright
• Copyright Act (1985) as amended
• Copyright is the sole right to reproduce, publish, publicly perform,
telecommunicate to the public and effect other defined activities in
respect of literary, dramatic, artistic and musical works.
– Limitations and exceptions: fair dealing, fair use.
• Copyright also applies to: compilations, broadcast signals,
performers’ performances and sound recordings.
• First owner of copyright: author or employer.
• Protection:
– Copyright does not protect ideas, only their expression or fixation.
– Protect original works against the unauthorized reproduction in different media,
publication, public performance and telecommunication to the public
• Copyright does not need to be registered.
– In Canada, copyright in a written work lasts for the life of the author plus 50 years
beyond the end of the calendar year in which they died (Section 6 of the
Copyright Act).

10. /10
Patent
• Patent Act (1985) as amended
• A patent is a set of exclusive rights granted by a national
government to an inventor or their assignee for a limited
period of time in exchange for a public disclosure of an
invention.
• Prerequisites for protection
– Must be a prescribed invention
– Utility
– Novelty
– Non-obviousness
• Patent process
– The application
– Priority dates and filing procedure
– Costs
• Protection for 20 years (non-renewable) from the date of
application.

11. /11
Trade-marks
• Trade-Marks Act (1985)
• A trade-mark is a word, symbol or shape used to
distinguish a person's goods or services from those
of others.
• Trademarks are registered or unregistered (based
on use).
– Registration of a trade-mark is granted for indefinitely renewable
periods of 15 years.
– Exclusive right to use the mark throughout Canada in respect of
the goods and services for which it is registered.
– A trade-mark need not be registered to be protected, but it will
not ensure protection throughout Canada (geographical area –
reputation, goodwill).

12. /12
Trade Secrets
• Not regulated by any statute other than the Civil Code of
Québec.
• Trade secret: any confidential business information which
provides an enterprise with a competitive edge
– Proprietary "confidential information“: Any secret formula or process of
manufacture of a product or business method known exclusively by the
business.
– Does not apply to information generally known or obtainable.
• Case law:
– Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2
S.C.R. 574 (Supreme Court of Canada): Requires the existence of a
“special relationship”
– Proprietary information may apply to information obtained in the course
of negotiating a business relationship, such as a joint venture.
• Most flexible form but offers the weakest protection.
– Legal right stems from existence of a contractual or other relationship
imposing an obligation of confidentiality.

13. /13
Industrial Designs
• Industrial Design Act (1985)
• An industrial design registration under the Industrial Design
Act protects the aesthetic features of a useful article.
• Ornamental
– Designs having an original conception of shape, configuration,
pattern or ornamentation.
– Entirely functional features may not be the subject of
registration.
• Mass production
– Features of the construction, mode of operation and functioning
of an article may be patentable, but cannot be registered as
industrial designs.
• Registration is required
– Registration is valid for 10 years from the date of registration
– Renewable

14. /14
Domain Names
• A domain name is the address of a web site that is intended to
be easily identifiable and easy to remember.
• Domain names have become business identifiers and,
increasingly, even trade-marks.
– May garner trade-mark rights if they meet the statutory or
common law requirements for trade-marks
• Domain name disputes arise largely from the practice of
cybersquatting (pre-emptive registration of trademarks by
third parties as domain names).
• System of private law
• International in scope
• Dispute resolution can be done privately or through national
courts

15. /15
Plant Breeders’ Rights
• Plant Breeders' Rights Act (1990)
• New varieties of certain plants may be protected in the same
way an inventor protects a new invention with a patent.
• Protection
– The owner obtains the exclusive rights to produce for sale, and
to sell, reproductive material of the variety.
– Protect the variety from exploitation by others.
– Owner can take legal action against individuals or companies
that are propagating and selling reproductive material without
permission.
• Criteria:
– new, distinct, uniform, and stable.
• Registration is required
– Plant Breeders' Rights are granted for a period of up to 18 years,
effective from the date of issue of the rights certificate.

16. /16
Topographies
• Integrated Circuit Topography Act (1990)
• Semiconductor chip protection/ integrated circuit topography
rights
• Topographies are the three-dimensional configurations of
electronic circuits used in microchips and semiconductor
chips.
– Creation of new layout-designs which reduce the dimensions of existing
integrated circuits and simultaneously increase their functions.
– The smaller an integrated circuit, the less the material needed for its
manufacture, and the smaller the space needed to accommodate it.
• Protected for 10 years from the filing of an application for
registration or the date of first commercial exploitation,
whichever is earlier.
• Topographies must be registered within two years of first
commercial exploitation.

17. /17
Developing IP
• Employees
– Assignment agreement, confidentiality agreement, waiver of
moral rights.
– Section 13(3) of the Copyright Act
– Moral rights may not be assigned, but may be waived in whole or
in part. A simple assignment of copyright in a work does not
constitute a waiver of moral rights.
• Consultants
• Subcontractors
• Using third-party intellectual property as a base
• Open source code
• The special case of universities and R&D institutions

18. /18
Commercializing IP
• Licensing
• By the owner itself
– Distribution channels
• Distributors
• Resellers
• Direct sales
– Manufacturing issues
• Location
• Quality concerns
• Theft of intellectual property worries
• Packaging
• Other operational issues

19. /19
Transferring IP
• Assigning
– Agreement in writing
– Reversion: An original work reverts to the author 25 years after
their death (Section 14(1) of the Copyright Act)
– Moral rights cannot be assigned (Section 14.1 of the Copyright
Act
• Licensing
– Exclusive
– Non-exclusive
– Sole Licensing
– Subtopic
– Territory
– Formalities

20. THE OPERATIONAL PERSPECTIVE BY
MARK MACLEOD

21. © StartupCFO Enterprises Inc.
Introduction
mark macleod
CFO
Advisor
Investor

22. © StartupCFO Enterprises Inc.
Agenda
IP Categories
Patent Landmine
Costs
Do’s & Don’ts
IP and Financing

23. © StartupCFO Enterprises Inc.
Categories of IP

24. © StartupCFO Enterprises Inc.
Patent Landscape

25. © StartupCFO Enterprises Inc.
Patents
-“...the exclusive right granted by a government to an inventor
to manufacture, use, or sell an invention for a certain number of years.
-Issues: Costs. Enforcement

26. © StartupCFO Enterprises Inc.
Costs
-Patentability search: 2K$ to 4K$ (optional, but useful)
- US provisional: 5K$ to 6K$
- PCT and US regular: 12K$ to 14K$ (12 months later)
- Canada and Europe: 10K$ (30 months after the first filing)
- Responding to office actions from each patent office: 12K$ to
20K$ (18-60 months after the first filing)
- Maintenance fees (Europe and Canada): 1500$/year
(starting at 36 months after first filing)

27. © StartupCFO Enterprises Inc.
Costs (cont.)
Including government fees and professional fees)
- Availability search (optional, but recommended) : Combined
for Canada and US : 1800$; Europe 1500$
- Registration for Canada : 1500$;
- Registration for US : 2200 to 2500$ (per class)
- Registration for Europe : 3000$

28. © StartupCFO Enterprises Inc.
Dos
 Have well drafted employment offers, employment
agreements, subcontractor agreements
 Ensure all staff, subcontractors assign IP and have
confidentiality restrictions
 Use specialized counsel
 Be aware of the IP landscape
 Protect trademarks, copyrights, trade secrets
 Approach patents with caution

29. © StartupCFO Enterprises Inc.
Don’ts
 Assume NDAs protect
 Assume patents protect
 File lame patent applications
 Publicly disclose before a provisional filing

30. © StartupCFO Enterprises Inc.
IP and Financing
Crucial Elements:
IP assignment
 Licensing rights
 Open source
Less crucial:
 Patent filings
 Trademarks, copyrights

31. THE TAX PERSPECTIVE BY
SYLVAIN GUINDON

32. TAX TREATMENT OF IP
• Purchased IP:
- Deduction on 75% of cost of IP amortized at 7% on declining balance
• Created IP:
- No deduction

33. TAX RATES FOR COMPANY
2010
Nature of revenue Federal Québec Combined
Active Business Income 18% 11,9% 30,9%
Small Business Deduction 11% 8% 19%
Investment Income 34,67% 11,9% 46,57%

34. TRANSFERING YOUR IP TO A CORPORATION
AND/OR TO A HOLDING COMPANY
There are various advantages
of transferring your IP into a
holding company such as
creditor proofing, using inter-
company losses or using losses
that will expire.
Tax impact on the transfer:
• Possibility to transfer your IP with no
tax impact to your holding company
• Possibility to elect a proceed of
disposition up to the value of your
property (in order to create income
and use your expiring losses)
• Possibility to pay royalties to your
holding company for the use of the IP

35. SELLING YOUR COMPANY
There are various points to take into consideration when it is time to
sell your IP as part of your Company:
• Valuation of your IP
• Selling the assets
• Creates business income up to 50% of the proceed of disposition:
- Tax will arise from this disposition
- 50% could be distributed tax free to the shareholders
• Selling the shares:
- Lifetime capital gain exemptions of $750,000

36. TRANSFERING YOUR IP INTO AN OFFSHORE
COMPANY
Income attributable to foreign
affiliates would be taxable in
those jurisdictions.
Therefore, considering moving
the IP into an offshore company
may result in important tax
savings.

37. TRANSFERING YOUR IP INTO AN OFFSHORE
COMPANY
Tax impact of the sale of the IP to the offshore company:
• Tax will arise from the disposition of the IP:
- Think about transferring when the value is low
•There are many impacts to consider when dealing with a foreign affiliate
company :
- Discuss with an international tax specialist before proceeding

38. SCIENTIFIC RESEARCH AND EXPERIMENTAL
DEVELOPMENT (SR&ED)
SR&ED tax credits can provide up to 82% return on some eligible
expenses!!!
Rates:
Federal Québec
35% 37,5%
20% 17,5%
Three (3) conditions:
• Technology advancement
• Technological uncertainty
• Systematic investigation

39. SCIENTIFIC RESEARCH AND EXPERIMENTAL
DEVELOPMENT (SR&ED)
Eligible Costs:
• Salary (Federal & Québec)
• Material (Federal only)
• Subcontractors (Federal & Québec)
• Overhead (Traditional vs. Proxy) (Federal & Québec on Salaries &
Subcontractors)
• Capital assets (Federal only)

40. THE VALUATION PERSPECTIVE BY
SYLVAIN CARON

41. WHAT IS IT WORTH?
This is a frequently asked question
• It’s worth what it costs to produce it!
• It’s worth the cash flow that it can generate or save in the future!
• It’s worth what the market is willing to pay!

42. WHAT IS IT WORTH?
The value is based on the risk of the asset
The asset could be the business, the building, the trade name, the technology, the
patent, etc.
The return is the gain on an investment (interest, dividend, capital gain)
The risk is presented as the rate of return
An investor will require more return for a riskier investment.
How much return do we expect from the asset?
Are we sure or not to receive the return (interest, dividend, capital gain)?
Is our initial investment guaranteed or not?
How long will it take to get our initial investment back including interest?

43. WHAT IS IT WORTH?
The value is based on the risk of the asset

44. WHAT IS IT WORTH?
A business is a mix of assets
The proportion of each type of asset helps to assess the risk of the
business:
•A convenience store – liquid assets in short term (inventory)
•A factory – tangible assets (raw material, equipment and machinery)
•A consulting firm – workforce, knowledge = intangible assets

45. WHAT IS IT WORTH?
Risk Factors
Common risk factors:
•History – an history of profit is better
•Size – a larger company is better (larger variation to effect the business)
•Industry / Market – a growing market is better
•Other – financing, management

46. Plummer, James L. QED Report on Venture Capital Financial Analysis (Palo Alto: QED Research, Inc. 1987)
Scherlis, Daniel R. and William A. Sahlman, A Method for Valuing High-Risk, Long-term, Investments: The Venture Capital
Method (Boston: Harvard Business School Publishing, 1987)
WHAT IS IT WORTH?
The risk and the stage of an entity’s development

47. WHAT IS IT WORTH?
Evolution of the value
The value is at a specific point in time.
The value can change due to :
Internal factors
• New product/technology
• New customer
• New strategy
External factors
• New technology
• New competitor

48. WHAT IS IT WORTH?
Intangible assets and goodwill
Existing technology to
existing customers
(Existing)
New technology to
existing customers
(In-process)
New technology to
New customers
(Goodwill) (Future)

49. QUESTIONS & CONTACT INFORMATION
Scott Rodie, CA
Audit Partner
BDO Canada LLP
514.931.5796
srodie@bdo.ca
Mark MacLeod
RealVentures
514.262.6004
mark@startupcfo.ca
Sunny Handa
Partner
Blakes, Cassels & Graydon LLP
514.982.4008
sunny.handa@blakes.com
Sylvain Guindon, CA, Pl. Fin.
Tax Partner
BDO Canada LLP
514.931.0841, ext. 2557
sguindon@bdo.ca
Matt Harrison, CA
Audit Senior Manager
BDO Canada LLP
514.931.0841, ext. 2507
mharrison@bdo.ca
Sylvain Caron
FAS Manager
BDO Canada LLP
514.931.0841, ext. 2556
scaron@bdo.ca