Intellectual property litigation can be the death knell of a startup.  Not only is the litigation costly, it distracts the company founders from operating and growing the business, and  it makes it a lot it harder (if not impossible) to raise capital.  If the litigation turns out really badly, an injunction can be issued that shuts down the business and there can be a substantial damages.

It’s impossible to completely protect a new business against an intellectual property lawsuit.  However certain steps can be taken, including:

1. Have trademark clearance searches conducted on all trademarks adopted, the name of the business, and the domain name used.

2. Have a right to use study conducted for any new products and methods.

3. Confirm ownership of all intellectual property of the business.

Even if these steps are taken, litigation can still result.  The diagram below can be helpful and gives you a rough overview of what happens if litigation occurs in a Federal Court. Hopefully this graphic also provides good incentive for avoiding it. I also have a good summary that compares patents, trademarks, copyrights and trade secrets, Send me an email at info@pasadenaangels.com if you’d like a copy.

The current economic crisis which we are facing is having a major impact on business everywhere. As one might expect, it is also having a significant impact on funding of early stage companies.

Earlier this month, Sequoia Capital communicated the seriousness of the situation with their portfolio companies (http://tinyurl.com/3sqrgy). The presentation started with a slide entitled “R.I.P Good Times” and ended with one which said simply “GET REAL OR GO HOME” before the Q & A. In between, there was substantial data presented on the economic reality along with strong advice on the need to preserve capital and to achieve profitability in short order.

Benchmark Capital communicated a similar message to their portfolio companies (http://tinyurl.com/3ku6es). They related the advice of a CEO who took a company during the dot-com crash through a 78% reduction in staff size, but was able to achieve profitability and eventually an IPO. The message was clear- survival mandates rapid course correction by all participants.

It appears that companies are starting to take heed of this advice. Just today the Financial Times reported a rapid reversal of the previously good mood, and a wave of job losses in Silicon Valley (http://tinyurl.com/5vrz3y). They cited the Sequoia meeting as a catalyst. Furthermore, CNET has started a live “scorecard” of tech layoffs to track the trend (http://tinyurl.com/5hcgkf).

So what does this all mean for the early-stage company which is trying to raise its first round of angel capital? First, it is important to understand that the cost of risk capital at all levels will go up substantially. This will directly translate into lower valuations and more stringent deal terms. Second, some companies which might have been fundable one year ago will no longer be able to raise funding- the bar has gone up. Third, it will take longer to close a funding event and may require the participation of more than one angel group to achieve the needed momentum. Fourth, turning to the operating plan, future funding needs, the cost of that money (higher), and the timeline needed to obtain it (longer) should be factored in. Revenue projections need to account for the current and anticipated future economic climate.

On the other hand, the door is not closed for focused entrepreneurs who have created disruptive new technologies in large and growing markets. There are major areas of unmet need in the green space, in healthcare (such as heart disease, obesity, and neurology), and in other areas. The key for the start-up today is to obtain market traction and profitability as quickly and as financially efficiently as possible.