Intellectual property is an intangible and created asset that has legal protection from unauthorized use, distribution or sale.
Intellectual property (IP) covers products, artistic or literary works, inventions, logos and other things that are created and have legal protection as an intangible asset.
An idea in itself is not IP. To become intellectual property, the idea needs to have been turned into something that’s expressed in a legally defined way.
“The owner of intellectual property has legal rights over how the asset is used, which means it can’t be sold, distributed or used by someone else without permission,” says Maximilian Yam, Associate, Intellectual Property-Backed Financing at BDC Capital.
“IP can be a valuable core asset for many companies, and it’s important to think about how to protect and leverage it.”
What are the main types of intellectual property?
There are four main types of protection available, depending on the nature of the intellectual property:
A patent is a legal protection available for inventions. To qualify, the invention must be novel, useful and non-obvious. The inventor has to disclose information about the invention to a patent office and is granted a certain period of legal protection (the duration varies by jurisdiction).
A patent allows the owner to prevent others from using the invention, but may not allow the user to sell the invention if there are other patents covering it. As an example, an inventor may have patented a new ink cartridge for retractable pens but may not be able to sell it if another inventor already has a patent.
The protection applies in the jurisdiction covered by the patent office, and coverage must be sought on a country-by-country basis. Since the invention must be novel, a patent application usually needs to be filed before an invention is disclosed to the public (though some countries allow a limited grace period during which a patent application can be filed later).
In some jurisdictions, you can also apply for a design patent, also referred to as industrial design rights. This covers aesthetic aspects of a product, such as its shape, configuration or ornamental design.
2. Copyrighted material
Copyrighted material is creative work that is written down or otherwise committed to some medium of expression, such as a painting, poem or photo.
The material is automatically copyrighted as soon as it is expressed. You can also register it with a copyright office, in which case you’ll be accessing a more established and formal process to enforce against infringement. “Registering copyright gives the copyright holder more tools to prevent unauthorized reproduction,” Yam says.
The copyright holder has the exclusive right to use, distribute or sell the material for a specific number of years (this varies by jurisdiction). After this period, the material enters the public domain and can be used by anyone.
A trademark is a word, symbol, phrase or other mark that distinguishes your product or brand. Registering a trademark gives you exclusive rights to use it, provided you keep using the mark and maintain the protection.
4. Trade secrets
Trade secrets are confidential or competitive information, algorithms, formulas, customer or supplier lists, recipes or processes that create value from being secret. They aren’t registered but can be protected by various legal mechanisms, such as non-disclosure, confidentiality and employment agreements.
To qualify, you’ll need to take reasonable steps to protect the information from disclosure, such as restricting or segmenting access to important information. A business can take legal action to stop unauthorized disclosure and possibly seek damages for harms that result.
Why is intellectual property important?
IP is important for businesses because it can help differentiate them and create a competitive advantage. “IP can be a vital part of your assets,” Yam says. “It might be a patent that gives you the ability to create a product your competitor can’t offer, or trademarks that help protect your brand and reputation. IP can help you stand out as a company and prevent others from replicating what you’re doing.”
IP can make up a significant portion of a company’s valuation due to the value it generates. Although it can appear on the balance sheet under intangible assets, the true value might be higher. “Many software and other technology companies don’t have a lot of tangible assets, and intangible assets, particularly IP, is their core asset,” Yam says. “IP is critical for these companies because that’s what makes them stand out.”
What are examples of intellectual property assets?
There are four main types of IP. Here are examples for each of them:
- specialized devices or improvements to machines
- mechanical processes
- software processes, pharmaceutical drugs, chemical compounds, new varieties of plants (also referred to as plant breeder’s rights)
2. Copyrighted material
Literary, artistic and musical works, films, web content
Logos, slogans, product and brand names, sound trademarks
4. Trade secrets
Formulas, processes, supplier and vendor information, customer lists, algorithms, marketing strategies, pricing information
What is intellectual property infringement?
IP infringement is the unauthorized use, sale, reproduction or distribution of intellectual property in violation of legal protections.
This can include:
- Selling or using—Selling, distributing or using a patented product or copyrighted material without permission.
- Causing confusion—Using a logo or brand name that can be confused with an existing trademark.
- Uploading—Posting copyrighted material to the Internet.
- Disclosing—Revealing confidential business information to a competitor.
There are some cases in which you can legally use IP without permission. The specifics depend on the jurisdiction and should be reviewed carefully with a legal professional.
- Fair dealing—In Canada, fair dealing, referred to as fair use in other jurisdictions, gives a limited ability to use copyrighted material for educational purposes, commentary or parody. Work that is substantially altered can in some cases also be used, though interpretations vary for how much alteration is required. Commenting and critiquing a clip of a movie will likely be viewed differently than uploading the clip alone.
- Public domain—Copyrighted and patented creations enter the public domain after a certain number of years and, at that point, can be used without permission.
- Use in other jurisdictions—Some IP rights such as patents only apply in the jurisdiction where they are granted. To extend protection to other jurisdictions, a business will need to submit additional applications. If proper filings are not obtained there may be very little to prevent unauthorized use.
If in doubt, it's important to engage a legal expert to ensure you aren’t infringing on someone else’s IP. An expert can also help you develop a strategy to protect your own IP.
What is an IP strategy?
An IP strategy is a process that helps to identify IP and determines how best to protect and make use of it. It helps a company gain competitive advantage, reduce risks and create value from its IP assets as part of its overall business strategy.
An IP strategy typically consists of these components:
1. Identifying IP assets
The first step in your strategy is to identify IP assets, including those still under development. This should include assets that could potentially be protected by patents, copyright, trademarks, and trade secret protections.
2. A plan to protect your IP
An IP strategy should also include a process for protecting your IP against infringement. “Before you disclose your IP to the public, it’s important to think about the best way to protect it,” Yam says. “Is a patent, trademark or design rights protection the most appropriate? Could someone reverse-engineer your product or copy it?”
Steps typically include:
- developing rules for employees and contractors to safeguard IP and prevent them from infringing on other organizations’ IP rights
- identifying the best ways to protect your IP based on required disclosures
- aligning filing jurisdictions with current and future business operations
- clarifying who owns IP that was created as part of employment
- monitoring the competitive landscape and looking for infringements of your IP
For more on IP strategy, see the BDC blog Why your business needs an intellectual property strategy.
3. A plan to leverage your IP
You can think about ways to use your IP to attain your business goals. This could involve:
- creating new products based on your IP
- licensing your assets to another business
- partnering with others to develop or monetize IP
4. Monitoring the external IP landscape
It’s useful to know what your competitors are doing in terms of IP. You can monitor the competitive IP landscape by:
- attending trade shows
- perusing other companies’ marketing material
- monitoring patent filings
- reverse-engineering products
- developing policies for employees to ensure they respect other companies’ IP and reduce risks of infringement or licensing disputes
Experts who can help you develop an IP strategy
|IP lawyers||Enforce IP protections, negotiate licensing agreements and develop employee agreements|
|Patent agents||Prepare, file and enforce patent applications|
|Technology transfer specialists and IP consultants||Develop an IP strategy and commercialize IP|
|IP managers||Manage IP and monitor infringements|
How do you create an IP strategy?
Smaller businesses can start creating an IP strategy by identifying their IP assets and making a plan to protect them. It may not be possible or practical to protect everything at once, but having a plan makes it easier to implement protection when it is possible.
As you become more adept at this, and perhaps create more assets that need protecting, you’ll be equipped to leverage your IP assets and monitor the IP landscape.
What’s key is to start thinking about an IP strategy before you begin to sell or disclose new products or other works. Waiting too long to take these steps can make it harder to protect your assets.
There are many free resources from the Canadian Intellectual Property Office and other patent offices that can provide information on how to build an IP strategy.
Why do you need an IP strategy?
An IP strategy is important because it helps your company align its goals in a way that creates the most value from its IP assets.
“IP may be one of your key assets, representing a significant portion of your valuation and competitive edge,” Yam says. “Not protecting it is like having your bank password left out in public. Before you disclose products or other IP assets, it’s important to ensure they’re appropriately protected.”
This also applies to trade secrets. “It’s important to make sure that the ownership of IP and the transfer and assignment of it are well defined,” Yam says. “This can help minimize disputes with employees or contractors about who owns a patent or even a couple of lines of code.”
Many companies neglect creating an IP strategy and discover too late that their assets aren’t well protected. “If a company fails to protect its intellectual property, it may not realize its mistake until it’s already experiencing harm,” Yam says. “It’s often challenging at that point to go back and make changes. The damage may have already been done.”
One company that potentially lost value
Yam gives the example of a company that filed for patent protection for a key product in the U.S. but later decided to sell the product in other countries without applying for patent protection there, too. The business only realized after it started selling the product elsewhere that the U.S. patent didn’t apply. It was too late at that point to file a new application because the product was already being sold and was no longer considered novel.
The result was a potential loss of value since competitors or customers could reverse-engineer the product. “It became harder for them to protect their invention,” Yam says. “It may cost money to create a solid IP strategy, but it’s a good investment if it protects your assets and allows you to make more money down the road.”
How will an IP strategy help your business?
An IP strategy helps your business by:
- protecting your IP assets and your competitive advantage
- allowing you to better monetize your IP assets
- improving your credibility with bankers and investors, who will see where the value in your business lies and how it is created and protected
- reducing the chances of infringement or licensing disputes with other organizations
What is intellectual property-backed financing?
IP-backed financing considers the tangible and intangible assets of the company. It can come in the form of debt, quasi-equity or equity financing.
Some lenders tailor IP-backed financing to a company’s specific needs. This could include flexible investment terms, convertible notes or other solutions that don’t dilute existing investors.
The investor normally performs due diligence to understand the company and its IP portfolio and strategy. “This gives us a higher level of confidence in the company and its ability to execute long term and allows us to arrive at a value for what we think their IP portfolio might be worth as collateral or in liquidation,” Yam says.
How IP-backed financing can help your business
IP-backed financing can be useful for companies that don’t have significant tangible assets. “A company may not have a lot of tangible assets, but it might have a strong portfolio of patents or a well-established brand,” Yam says.
IP-backed financing allows the company to continue to create value. BDC Capital’s IP-backed financing allows businesses to access their most valuable asset through debt or equity financing.
“It can allow a business to access a debt product that doesn’t dilute existing investors and allows them to raise more money in a subsequent equity round at a higher valuation,” Yam says. “Alternatively, they could have a competitive advantage and a way to protect their innovations through a strong portfolio of patents and trade secrets, making it an attractive equity opportunity.”
IP-backed financing can offer tailored, flexible, non-dilutive financing that allows early-stage or growing companies to extend their runway and achieve a higher valuation.