IP 101 for Startups


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

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  • Section 13(3) of the Copyright Act:
    Work made in the course of employment
    (3) Where the author of a work was in the employment of some other person under a contract of service or apprenticeship and the work was made in the course of his employment by that person, the person by whom the author was employed shall, in the absence of any agreement to the contrary, be the first owner of the copyright, but where the work is an article or other contribution to a newspaper, magazine or similar periodical, there shall, in the absence of any agreement to the contrary, be deemed to be reserved to the author a right to restrain the publication of the work, otherwise than as part of a newspaper, magazine or similar periodical.
    Section 13(4) of the Copyright Act:
    Assignments and licences
    (4) The owner of the copyright in any work may assign the right, either wholly or partially, and either generally or subject to limitations relating to territory, medium or sector of the market or other limitations relating to the scope of the assignment, and either for the whole term of the copyright or for any other part thereof, and may grant any interest in the right by licence, but no assignment or grant is valid unless it is in writing signed by the owner of the right in respect of which the assignment or grant is made, or by the owner’s duly authorized agent.
  • Section 14(1) of the Copyright Act:
    Limitation where author is first owner of copyright
    14. (1) Where the author of a work is the first owner of the copyright therein, no assignment of the copyright and no grant of any interest therein, made by him, otherwise than by will, after June 4, 1921, is operative to vest in the assignee or grantee any rights with respect to the copyright in the work beyond the expiration of twenty-five years from the death of the author, and the reversionary interest in the copyright expectant on the termination of that period shall, on the death of the author, notwithstanding any agreement to the contrary, devolve on his legal representatives as part of the estate of the author, and any agreement entered into by the author as to the disposition of such reversionary interest is void.
    Section 14.1 of the Copyright Act:
    Moral rights
    14.1 (1) The author of a work has, subject to section 28.2, the right to the integrity of the work and, in connection with an act mentioned in section 3, the right, where reasonable in the circumstances, to be associated with the work as its author by name or under a pseudonym and the right to remain anonymous.
    No assignment of moral rights
    (2) Moral rights may not be assigned but may be waived in whole or in part.
    No waiver by assignment
    (3) An assignment of copyright in a work does not by that act alone constitute a waiver of any moral rights.
    Effect of waiver
    (4) Where a waiver of any moral right is made in favour of an owner or a licensee of copyright, it may be invoked by any person authorized by the owner or licensee to use the work, unless there is an indication to the contrary in the waiver.
  • IP 101 for Startups

    1. 1. Perspectives on Intellectual Property Presented by: Sunny Handa Mark MacLeod Sylvain Guindon Sylvain Caron November 3, 2010
    2. 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
    4. 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. /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. /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. /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. /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. /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. /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. /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. /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. /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. /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. /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. /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. /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. /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. /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
    21. 21. © StartupCFO Enterprises Inc. Introduction mark macleod CFO Advisor Investor
    22. 22. © StartupCFO Enterprises Inc. Agenda IP Categories Patent Landmine Costs Do’s & Don’ts IP and Financing
    23. 23. © StartupCFO Enterprises Inc. Categories of IP
    24. 24. © StartupCFO Enterprises Inc. Patent Landscape
    25. 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. 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$/year (starting at 36 months after first filing)
    27. 27. © StartupCFO Enterprises Inc. Costs (cont.) Including government fees and professional fees) - Availability search (optional, but recommended) : Combined for Canada and US : 1800$; Europe 1500$ - Registration for Canada : 1500$; - Registration for US : 2200 to 2500$ (per class) - Registration for Europe : 3000$
    28. 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. 29. © StartupCFO Enterprises Inc. Don’ts  Assume NDAs protect  Assume patents protect  File lame patent applications  Publicly disclose before a provisional filing
    30. 30. © StartupCFO Enterprises Inc. IP and Financing Crucial Elements: IP assignment  Licensing rights  Open source Less crucial:  Patent filings  Trademarks, copyrights
    32. 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. 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. 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. 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. 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. 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. 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. 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)
    41. 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. 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. 43. WHAT IS IT WORTH? The value is based on the risk of the asset
    44. 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. 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. 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. 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. 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. 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