Intellectual Property Issues for Startups Participating in Entrepreneurship Support Programs in Wisconsin
Nathaniel S. Hammons, Intellectual Property Issues for Startups Participating in Entrepreneurship Support Programs in Wisconsin, 22 Marq. Intell. Prop. L. Rev. 3 (2018)
22 Marquette Intellectual Property Law Review 3 (2018)
Wisconsin is not known as a bastion of startup activity. Yet the startup scene has changed significantly since the turn of the century, and the pace of change has been accelerating. In 2001, only eight early-stage Wisconsin companies raised capital, totaling less than $53 million. In 2016, by way of comparison, 137 early-stage Wisconsin companies raised more than $276 million in investment capital. As someone familiar with the state might surmise, more than half of the deals closed in 2016 were in the Madison area, home to the University of Wisconsin-Madison and large employers in information technology, healthcare, and life sciences, among other sectors. Despite ranking 82nd in the United States by population, Madison has garnered national attention for its startup activity, with one recent study ranking the city sixteenth in a list of “Next in Tech” cities.
Startup activity is not confined to the Madison area, with early-stage investor networks and funds active in Milwaukee, the Chippewa Valley, La Crosse, the Fox River Valley, and elsewhere in the state. Milwaukee, the largest city in the state, is known to have less startup activity than Madison. Yet a 2017 article in Inc. Magazine designated Milwaukee as one of three cities in the country to which startups should consider moving, in part due to the city’s affordable rent and proximity to large companies such as Rockwell Automation, GE Healthcare, and Johnson Controls.
Startups are not created, and do not grow, in a vacuum. Indeed, a strong startup ecosystem—i.e., a region’s entrepreneurs, investors, mentors, service providers, support organizations, etc., and the connections between the various players—encourages and facilitates the growth of new ventures. Wisconsin’s cosystem has strengthened and deepened, particularly with respect to the creation and expansion of programs that support entrepreneurship and startups. Wisconsin is now home to accelerators, incubators, hackathons, business contests, co-working spaces, startup social groups, and startup service organizations—many of which came into existence within the last ten years. Among other things, these programs help entrepreneurs test and hone business ideas; meet potential co-founders and business partners; receive cash awards, seed investments, and in-kind support (e.g., legal and accounting services); connect with advisors and investors; and receive third-party validation, which can enhance a startup’s reputation. Consequently, acceptance into a support program, especially one that is selective, is often a significant moment in the life of a startup.
Participation in entrepreneurship support programs, however, is not without risk. This Article examines the risks that participation may create with respect to a startup’s intellectual property, something of critical importance to the longterm success of any modern business venture. If issues exist regarding a startup’s intellectual property, the company exposes itself to significant liability by doing business in the marketplace. Such issues can also threaten a startup’s ability to obtain venture capital financing, as intellectual property is a core component of the investment due diligence process.
Support programs are an important focal point because they involve the insertion of third parties—i.e., mentors, service providers, customers, business partners, and potential co-founders—into the growth and development of a startup. In the author’s experience, startups in Wisconsin often engage with those third parties informally, i.e., there are no written agreements in place. Informal relationships can lead to significant problems for startups, especially when intellectual property is created, used, or disclosed in the relationship. For example, a developer might write software code for a startup during a hackathon or other entrepreneurship program. Under basic rules of copyright law, the startup will not hold any rights to that code until it is properly assigned or licensed to the company, such as through a written agreement. Another example is where a startup discloses trade secrets or an invention to a mentor. As is common practice in Wisconsin and elsewhere, many mentors have not signed—and, in some cases, will not sign—a non-disclosure agreement. Consequently, disclosure of trade secrets or inventions to a mentor may result in loss of trade secret rights or patent rights, respectively.
Attorneys can, and often do, counsel startups to formalize relationships through signing of written agreements addressing intellectual property. But such advice is broad-stroked, and it does not account for why informality is now so commonplace. Entrepreneurship support programs embrace informal relationships because, among other reasons, they (1) are attractive to resourcepoor startups; (2) have low transaction costs; (3) are believed to lead to natural, as opposed to forced, matches; (4) are viewed as community-oriented; and (5) are attractive to, and sometimes required by, volunteers who support these programs. Furthermore, the reliance on informal relationships is, in the author’s opinion, an outgrowth of “lean startup,” a popular methodology for developing early- stage businesses. Lean startup embraces that, for most industries, constant feedback from customers and other third parties is more important than secrecy because feedback allows a business to rapidly develop and iterate its products or services. Lean startup stands in contrast to “stealthmode,” a methodology popular at the turn of the century that involved disclosure of little information outside a startup prior to product launch. Until lean startup loses influence and the other preceding factors are addressed or proven untrue, entrepreneurship support programs are unlikely to halt their use of, and reliance on, informal relationships.
This article examines the intellectual property issues startups face by participating in support programs in Wisconsin, factoring in how and why the programs operate as they do. Section I of this article provides an overview of the entrepreneurship support programs. It includes a discussion of the informal relationships that commonly arise during the programs. Section II provides an overview of the main types of intellectual property startups encounter, namely, copyright, trademarks, trade secrets, and patents. The section discusses problems that startups commonly encounter for each type of intellectual property, and tools and practices for addressing those problems. Section III explores how entrepreneurship support organizations in Wisconsin can—and, in some cases, do—foster intellectual property ownership in early-stage startups.
Hammons, Nathaniel S., "Intellectual Property Issues for Startups Participating in Entrepreneurship Support Programs in Wisconsin" (2018). Faculty Publications. 699.