IP 101 for Startups

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					Perspectives on Intellectual Property
Presented by:   Sunny Handa
                Mark MacLeod
                Sylvain Guindon
                Sylvain Caron

                                  November 3, 2010
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
THE LEGAL PERSPECTIVE BY
DR. SUNNY HANDA
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

/4
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
/5
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
    /6
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.

/7
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).

/8
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).

 /9
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.
/10
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).
/11
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.
/12
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
/13
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
/14
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.
/15
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.
/16
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
/17
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
/18
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
/19
      –   Formalities
THE OPERATIONAL PERSPECTIVE BY
MARK MACLEOD
Introduction
                                mark macleod
                                   CFO




                                               Advisor
              Investor




© StartupCFO Enterprises Inc.
Agenda

  IP Categories
  Patent Landmine
  Costs
  Do’s & Don’ts
  IP and Financing


© StartupCFO Enterprises Inc.
Categories of IP




© StartupCFO Enterprises Inc.
Patent Landscape




© StartupCFO Enterprises Inc.
Patents

                   exclusive right granted by a government to an inventor
             -“...the
             to manufacture, use, or sell an invention for a certain number
             of years.

             -Issues: Costs. Enforcement




© 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)



© 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$




© 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


© StartupCFO Enterprises Inc.
Don’ts
                 Assume NDAs protect

            Assume patents protect

            File lame patent applications

            Publicly disclose before a provisional filing




© StartupCFO Enterprises Inc.
IP and Financing
           Crucial Elements:
           IP assignment
            Licensing rights
            Open source

           Less crucial:
            Patent filings
            Trademarks, copyrights




© StartupCFO Enterprises Inc.
THE TAX PERSPECTIVE BY
SYLVAIN GUINDON
TAX TREATMENT OF IP

• Purchased IP:
  - Deduction on 75% of cost of IP amortized at 7% on declining balance

• Created IP:
  - No deduction
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%
TRANSFERING YOUR IP TO A CORPORATION
AND/OR TO A HOLDING COMPANY
There are various advantages      Tax impact on the transfer:
of transferring your IP into a
holding company such as           • Possibility to transfer your IP with no
creditor proofing, using inter-     tax impact to your holding company
company losses or using losses
that will expire.                 • 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
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
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.
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
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
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)
THE VALUATION PERSPECTIVE BY
SYLVAIN CARON
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!
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?
WHAT IS IT WORTH?
The value is based on the risk of the asset
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
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
WHAT IS IT WORTH?
The risk and the stage of an entity’s development




  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?
Evolution of the value
The value is at a specific point in time.

The value can change due to :


           Internal factors                       External factors

    • New product/technology                • New technology
    • New customer                          • New competitor
    • New strategy
WHAT IS IT WORTH?
Intangible assets and goodwill




                                             New technology to
                                               New customers
                        New technology to    (Goodwill) (Future)
                        existing customers
                           (In-process)

           Existing technology to
            existing customers
                  (Existing)
QUESTIONS & CONTACT INFORMATION
    Scott Rodie, CA                 Sylvain Guindon, CA, Pl. Fin.
    Audit Partner                   Tax Partner
    BDO Canada LLP                  BDO Canada LLP
    514.931.5796                    514.931.0841, ext. 2557
    srodie@bdo.ca                   sguindon@bdo.ca

    Mark MacLeod                    Matt Harrison, CA
    RealVentures                    Audit Senior Manager
    514.262.6004                    BDO Canada LLP
    mark@startupcfo.ca              514.931.0841, ext. 2507
                                    mharrison@bdo.ca
    Sunny Handa
    Partner                         Sylvain Caron
    Blakes, Cassels & Graydon LLP   FAS Manager
    514.982.4008                    BDO Canada LLP
    sunny.handa@blakes.com          514.931.0841, ext. 2556
                                    scaron@bdo.ca

				
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Description: A copy of a presentation from Blakes (law firm), BDO (accounting) and myself on IP for startups