Due diligence helps potential investors know they are making a winning bet on your startup. Hence, investors conduct a detailed look “under the hood” of the company and the company’s IP is at center stage.

1. Mintz Levin. Not your standard practice.
Preparing Your Portfolio for Prime Time: IP
Due Diligence

2. Content
2
• How important is IP to a potential investor?
– Some thoughts about an IP strategy
• What is an IP due diligence?
– The Process Explained
• How should you prepare for an IP due diligence?
– Internal Audit Strategy
• Who can help?

3. How Important is IP to a Potential Investor?
3

4. • IP is frequently the reason for the investment
• Strong IP can ensure that a company has some market exclusivity
• IP protects the revenue stream
• Without strong IP, sales and/or price will erode
VC
Investor
How Important is IP to a Potential Investor?
4
“Without IP there is
nothing to invest in.”

5. • Develop an IP Strategy and link it to the Company Goals
• Any company worth an investment is always established with well-defined
goals and objectives
– These goals and objectives drive the conduct of the business and guide most
decisions
– The goals and objectives should inform the IP strategy as well (and hopefully there is
one)
Make the IP Attract Attention
5
Company
Goals
Company
IP

6. The Role of IP in the Business
6
• For technology-based companies, Intellectual Property is a critical and evolving
(and costly) asset of the business
– It supports and facilitates the company’s quest to attain its goals
• BUT, effective IP requires a strategic approach with thoughtful care and
feeding
• Be flexible – changes in the business may necessitate changes in the IP strategy
• Remember – the business drives the IP strategy

7. Thinking Strategically About Patents
7
• Offensive / Blocking: Blocking patents will be
necessary to prevent competitors from copying your
technology. These have the highest value.
• Defensive / Leverage: In highly competitive fields,
having leverage over your competitors will be
important to prevent lawsuits, provide opportunities
to counter sue, force a license, etc. The value of
having leverage over competitors will increase as the
company grows.

8. The Value of a Well Executed IP Strategy
8
• IP can create barriers to entry and provide market
exclusivity
― Increase (or preserve) revenue and maximize profit
margin
• IP can be enforceable against infringers
• IP can provide a direct revenue source (license
royalties)
• IP can provide leverage (defensive patents)

9. Adding More Value Through IP
9
• Design the IP to maximize its value
– For patents: multiple patents and multiple types of claims to best protect the
technology and its improvements
– Cover your product and its improvements
– Cover improvements on your competitors' products (leverage)
– Consider design patents – a cheaper and alternative form of protection
– Consider trademark protection if you are selling product

10. Adding More Value Through IP
10
• Design the IP to maximize its value
– For patents: multiple patents and multiple types of claims to best protect the
technology and its improvements
Cover
Cover your product
and its
improvements
Cover
improvements on
your competitors'
products (leverage)
Consider
Consider design
patents – a cheaper
and alternative
form of protection
Consider trademark
protection if you
are selling product

11. What is an IP Due Diligence?
11

12. What is an IP Due Diligence?
12
• Investors: "Will the IP help us win this bet?"
• Seeks to assess the extent to which a company’s IP
and its IP strategy will support the goals and
objectives of the company
– Helps investors confirm that a company is worth an
investment and that it justifies the magnitude of the
planned investment
• TIP: Stakes are high, so the company has to be sure
that its house is in order before the investors “look
under the hood”

13. Things Investors Will Want to Know
13
• Patentability: Will patents be granted?
• Claim Scope: How broad (or narrow) is the protection? Will it cover the
technology and design-arounds?
• Coverage: Are there multiple layers of protection and is the geographic
coverage acceptable?
• Ownership: Does the company own the IP? Alone?
• Enforceability: Can patents (claims) be enforced against competitors? Any easy
targets for validity challenges?

14. Things Investors Will Want to Know (cont'd)
14
• Freedom-to-Operate:
– Patents grant a right to exclude. They do not ensure a right to use!
– Remember: an improved and patented technology may be dominated by a more
basic patent.
– Do third party patents stand in your way to market?
• Agreements:
– Any issues with past employment agreements of key employees?
– Relevant license agreements and onerous terms?
– Are non-employee consultants obligated to assign to the company?

15. Things to Expect in an IP Due Diligence
15
√ The company’s products and intended
products
√ The strategy is the company pursuing to
protect its IP
√ The key competitors
√ The proposed markets
√ The IP portfolio – an itemized list of all
patents and pending applications
√ The key prior art in the field and how it
affects patentability
√ The relevant third party patents /
pending applications
√ Any potential barriers to FTO
√ Any agreements the company has with
employees and outside consultants
√ Any technology licensed granted to the
company
The scope of a due diligence will depend on the size of the investment. For significant
investments any potential investor will want a great deal of information and
documentation.
Among the information that will be requested is:

16. Things to Expect in an IP Due Diligence (cont'd)
16
√ How well do the issued and pending
claims cover the product/proposed
product?
√ Does the company have clear title to all
of its IP?
√ How well is the IP portfolio constructed
and can it keep competitors away from
the company’s key products and their
likely improvements?
√ Are there any likely FTO issues?
Counsel for the investors will undertake a detailed evaluation of all of this information.
Ultimately, the question is whether the company IP strategy is paying off – whether it is
supporting the business strategy and whether it will help the company succeed.
For a company looking to launch a product, investor counsel must answer the following
fundamental questions:

17. The Process
17
• Investor counsel will ask for all relevant information
and documentation
• The investors and investor counsel typically meet with
the company to learn about its technology and its
strategy

18. The Process (cont'd)
18
• The investor team will gain an understanding of:
The competitive environment
Study all issued patents and prosecution histories
Study all pending patent applications and prosecution histories
Ask for and review results of any patentability and FTO searches
Conduct independent searches
Assess conduct of patent prosecution
Assess FTO issues

19. The End Result of an IP Due Diligence
19
• Investor counsel will issue a detailed report, that:
– Identifies the IP portfolio
– Comments on claim scope and likelihood that claims will be allowed
– Comments on the value/scope of the claims
– (Possibly) recommends alternative strategies
– Identifies and discusses potential barriers to patentability
– Identifies weaknesses in the strategy and portfolio
– Discusses FTO and potential obstacles
• THIS REPORT IS WEIGHED HEAVILY BY INVESTORS
• IT IS ESSENTIAL TO GET A FAVORABLE REPORT

20. How should you prepare for an IP due diligence?
20

21. How should you prepare for an IP due diligence?
21
• Do your own due diligence, such as an internal audit – and do it as early as
possible
– BENEFITS:
• Help uncover any issues well in advance of the actual due diligence
• Company will be able to anticipate the hard questions likely to be raised by the investor team
and provide answers that (hopefully) are able to demonstrate that significant issues do not
exist
• Company demonstrates to its potential investors a high level of sophistication and a
commitment to “get it right”
– RESULTS:
• Steps can be taken to remedy any IP deficiencies and to mitigate any risk

22. How should you prepare for an IP due diligence?
(cont'd)
22
• When the company does its own pre-due diligence audit, it must take a critical
look at its IP portfolio
How well do the issued
and pending claims
cover the technology?
Are there easy design-
arounds?
Do the claims have
sufficient breadth to
encompass product
advancements?
Is there a possibility of
covering competitors’
products? What is the
level of risk presented
by third party patents?

23. 23
Assets Liabilities
Patents Significant prior art
Pending applications Third party blocking patents
IP license agreements Chain of title and ownership issues
Employee and consultant agreements Unnecessary claim amendments during
prosecution
Trade secrets Prior employment agreements and
obligations of R&D personnel
Trademarks
Copyrights
A Good Strategy for the Internal Audit
An “audit” is typically an accounting exercise, so treat it that way. Think of the
audit results in terms of a balance sheet and tabulate the assets and liabilities.

24. A Good Strategy for the Internal Audit (cont'd)
24
• Designate a point person, preferably one who
understands IP and the company’s technology and
business goals
• The point person should work with company legal
counsel
• Identify and articulate the IP strategy
• Highlight the strengths
• Identify the weaknesses
• Remedy and be prepared o explain the weaknesses

25. Defending the Due Diligence
25
• Anticipate and be able to address the "difficult" issues
• Rely on legal counsel and use the results of the internal audit
• Use the internal point person to coordinate the due diligence and
communicate with the investor team
– Through this person, articulate the company’s business strategy, its goals, and its IP
strategy
• TIP: Package all information – spreadsheets listing all IP, lists of prior art and
third party patents – so that it is readily available to investor counsel
– Investor team will appreciate readily available copies of patents and applications,
prosecution histories, and company agreements

26. Who can help?
26

27. Who can help?
27
• While it is essential for a company employee to serve as the internal point
person for the due diligence and any pre-due diligence audit, don’t forget to
engage company counsel
– BENEFITS:
• Invaluable resource for the company both during a pre-due diligence audit and the due
diligence itself
• Experienced in running an IP due diligence for investors as well as defending IP due diligences
for companies seeking investment
• Able to properly position the key IP assets and recognize any significant liabilities
• Involvement at early stage ensures that counsel is well apprised of the company’s IP strategy
• Can offer suggestions to further improve upon the company’s strategy

28. Who can help? (cont'd)
28
Ideally, the audit is
conducted well before any
due diligence
If any issues cannot be fully
resolved before the due
diligence, counsel will, at the
very least, have ample
opportunity to:
•Assess any issues
•Formulate a strategy that will
hopefully alleviate or minimize
any concerns by the investor
team

29. Member
Boston
617.348.3046
WGeary@mintz.com
JD, Case Western Reserve
University School of Law
BS, Polymer Engineering,
University of Massachusetts -
Lowell
Bill Geary
29
• Experienced patent and trademark attorney with a particular
background in medical technology, polymers and advanced
materials, and chemicals
• Provides counsel on all phases of patent and trademark law, through
development strategy, protection, and exploitation of patent and
trademark rights
• Clients include start-ups, large companies such as Johnson &
Johnson, medical technology manufacturers, and research
institutions such as Massachusetts General Hospital
• Represents clients in federal district courts and before the
International Trade Commission
• Recognized for his broad expertise, having received rankings from
Super Lawyers in both the Corporate Counsel Edition and the
Business Edition
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and is not intended as legal advice, and it should not be considered or relied upon as such.