Are You Investable? Vital Legal Strategies for Proptech Startups to Protect Their Company
The landscape of Proptech, like many tech-driven sectors, is evolving rapidly, with intellectual property (IP) protection at its core. As startups innovate, they must also ensure that their IP remains secure. During a recent CRETI Investor Session hosted by Goodwin’s Bethany Withers and Steve Charkoudian, we explored strategies that are vital for every Proptech startup to consider. Below are essential strategies derived from the discussion that will help Proptech founders safeguard their innovations and navigate the complexities of IP and data law.
1. Ensure Pre-Formation IP Is Transferred to the Company
Many Proptech startups begin their journey with a founder’s idea, and often, IP may be developed before the company is even formed. It’s crucial to formalize the ownership of that IP to avoid complications down the road, particularly as you prepare for funding rounds.
Action Step: All founders should sign a Technology Contribution Agreement or IP Assignment Agreement. This contract transfers any IP created before the company’s formation into the company's ownership. Investors expect to see that the company securely holds any pre-existing IP and won’t be contested by a founder or third party in the future. Ensure legal counsel reviews all IP-related agreements to avoid any gaps.
2. Lock Down Post-Formation IP
Once your company is up and running, the next challenge is ensuring that all subsequent innovations remain under the company’s ownership. Relying on vague language or incorrect assumptions can lead to significant risks. For example, relying on the “work for hire” doctrine is insufficient in all but the most limited of circumstances.
Action Step: Ensure that the company has a written confidentiality and IP agreement with each employee that explicitly includes language such as “I hereby assign to the company all technology and intellectual property I develop and all related intellectual property rights.” For contractors and consultants, ensure a Contractor or Consulting Agreement is in place stipulating the assignment of any technology and IP (and related IP rights) created in the course of their work. This step is crucial because investors and acquirers will specifically look for such language in your contracts during financings or acquisitions.
3. Global Expansion Considerations: International IP Assignments
Proptech is not confined to a single geography, and as your company scales, you’ll likely hire contractors and employees outside the U.S. Different countries have varying IP laws, and relying solely on U.S.-based agreements can leave gaps in your protection.
Action Step: When operating internationally, consult with local counsel to ensure IP assignment agreements comply with the specific requirements of the countries you’re working in and that you (and your consulting companies) have taken proper steps under local law to assign the IP to you and to waive moral rights. For instance, some countries in Eastern Europe require an annual attestation from individuals confirming they intend to assign their IP to the company. These nuances can have major implications if overlooked.
4. Protect Your Trade Secrets: Non-Disclosure Agreements (NDAs)
Trade secrets and other confidential information form a significant part of your company's value. Leaking such information could jeopardize your competitive advantage. NDAs are one of the simplest yet most important tools for protecting sensitive data and trade secrets when dealing with potential partners, investors, or third parties.
Action Step: When drafting NDAs, ensure they include three critical provisions:
A restriction against disclosing information to third parties or anyone who does not have a “need to know” the information.
A requirement to protect confidential information using a reasonable standard of care.
A restriction on using the information for any purpose other than the specified transaction.
These provisions are particularly important under trade secret law, which requires proof of reasonable care in protecting sensitive information.
5. Develop a Defensive IP Strategy
Building a robust patent portfolio and/or trade secret protection strategy can not only prevent others from using your innovations without permission but also serve as a defensive tool against competitors. Even if you don’t plan to aggressively pursue patent infringement cases, having a strong patent portfolio can deter larger companies from pursuing legal action against you if you have technology that would be best protected by patents. That said, in startup phase, a determination should be made as to whether it makes sense to spend time filing an extensive patent portfolio versus patenting a couple of your key technologies. Focus on building your products and services.
Action Step: While software-only solutions may face more challenges in securing patents, combining software with hardware can strengthen an argument for patentability. Many patent attorneys will speak with startups off-the-clock to understand the applicable technology and advise on whether patent protection would be viable and efficient. In some cases, a so-called “provisional” patent application (which is a temporary and often less expensive filing) may be filed to preserve the ability to file formal patent protection in the future. Even if patents are not filed, being able to explain to investors and acquirers that you’ve considered patent protection and chosen an appropriate alternative (such as trade secrets) is key.
6. Be Mindful of Evolving Employment Law: Non-Competes
Non-compete clauses have been a topic of heated legal discussion, especially after the Federal Trade Commission (FTC) moved to ban post-employment non-competes. This past August, a federal court in Texas enjoined the FTC from enforcing the rule after finding it unlawful. At least for now, all employers are excused from any obligation they may have had to comply with the FTC’s rule. However, the enforceability of non-competes varies by state, and proptech founders should be aware of how these laws might affect them, particularly in key states like California.
Action Step: While non-competes can be difficult to enforce in some states, like California, they may still be a consideration during Series A funding when investors might request them for key hires. Consulting with employment counsel about non-compete enforceability and structuring agreements appropriately is essential.
Final Thoughts
Proptech startups are not just about building technology; they’re about building defensible, scalable companies. Protecting intellectual property is a fundamental part of that process. By taking these steps, you can safeguard your innovations and position your company for successful financings and acquisitions.
In the words of Bethany Withers, “Having a sound IP strategy isn’t just about avoiding red flags for investors—it’s about ensuring the long-term viability of your company.”
As the sector grows, Proptech companies will face more scrutiny on how well they’ve protected their ideas, innovations, and data. These strategies will ensure that your IP remains a strong asset to your company as you scale and secure investments.