Bench to Market
Many Genomics Law Report readers hope for the opportunity to take a product or process from the research laboratory to the commercial market. “From Bench to Market,” our newest series of posts, will explore the key issues scientist-entrepreneurs will face in turning a research idea into a viable business. Attorneys at Robinson, Bradshaw & Hinson who specialize in the various stages of this process will offer practical background information and pointers. The series will track the development of a new business through each major step, from the decision to pursue commercialization all the way to the pot at the end of the rainbow, a financially successful business. Readers unfamiliar with the terminology associated with bringing a venture to market may find our glossary of terms to be of assistance.
Now, and as the series unfolds, we look forward to receiving your questions and feedback. No matter the stage of the commercialization process you may find yourself, if you have questions or if there are topics or issues that you would like to see addressed please let us know in the comments or by contacting us directly.
You just spent the last five years of your life working virtually 24/7/365 to build your company into one of the most respected firms in its field. Three years ago you barely could raise enough money to fund payroll and rent. Now you barely have enough time to run your business because of all the meetings with investment banking firms that want to talk about taking your company public. You hear rumors about competitors going public, and your outside investors and board members tell you to strike while the iron is hot.
You wonder what it would be like to run a public company and how it will affect your lifestyle. Based on the valuation ranges under discussion, your net worth (on paper at least) makes you feel like you just won the lottery. Serious people are saying that you could be the “next Google,” and you wonder what that would be like. You imagine yourself ringing the bell on the New York Stock Exchange.
You decide to have dinner with an old college friend, who is the chief financial officer of a public company, to share your news (against the advice of counsel). What she says makes you think.
You ask her how much stock you should sell in your IPO, and she tells you that you will be told not to sell any stock. You wonder why, especially given that your private equity investor plans to sell part of its investment, and she tells you that public investors will view the sale of stock by you as a sign that you do not believe in the future of your own company. You ask her why the same rules don’t apply to your outside investor, and she laughs and tells you that they just don’t.
The last few articles in the Bench to Market series discussed capital raises and licensing-out arrangements that facilitate an entrepreneur’s commercialization of a new product or process. To obtain capital or a licensing arrangement, an entrepreneur must often share a business plan and confidential information about the proposed product or process with potential investors or licensees. The entrepreneur should insist upon binding non-disclosure agreements that prohibit both the disclosure and misuse of such information, before disclosing any such valuable information.
While some inventors may hold intellectual property rights, such as patents, to protect their proprietary information, many entrepreneurs rely on trade secret protection early in the commercialization process. See our recent article, “Can You Keep a Secret?” Non-disclosure agreements are fundamental to trade secret protection, as they demonstrate that inventors have taken reasonable steps to hold their valuable proprietary information in confidence.
Fresh from a top biochemistry Ph.D. program, Beth was your fifth employee. Her technical expertise and ability to charm investors, lenders and prospective customers made her the obvious choice when, as the company burgeoned, you decided to formalize a roster of senior officers. As Executive Vice President for Biotechnology, Beth has since had a hand in every aspect of company business and operations.
Over the last year or so, however, Beth has moved from core asset to affirmative liability. She has missed critical internal and client meetings, and may go days without responding to calls or e-mails. According to her direct reports, she’s become largely invisible to them as well. You have no hint of what may be behind the situation.
Unfortunately, fundraising is a difficult, frustrating and lengthy process for most entrepreneurs. The path to financing does not end with a strong patented technology, a solid business plan and model, and an experienced and talented management team. Of course, a company that lacks any of these things likely will go unfunded. But in most situations, even a well positioned company needs the requisite relationships to make a financing happen, and it must navigate cumbersome federal and state securities laws to ensure it remains legally compliant.
Before an entrepreneur hits the road looking for money, he or she should be familiar with some basic legal principles applicable to raising capital. A new company must be cautious and thoughtful when seeking investments. As we explained in our earlier post on Raising Private Capital, every offering of securities must comply with the registration requirements of federal and state securities laws or qualify for an exemption from these requirements. Many companies structure private equity investments to comply with the Rule 506 exemption promulgated under Regulation D of the Securities Act of 1933, because it is the only federal exemption that preempts state securities laws and allows a company to raise unlimited amounts of money. As a result, it is a very attractive exemption without many of the restrictions and limitations imposed by other exemptions.
Last week in the Bench to Market series, we discussed the license-out business model as an alternative to raising capital for the commercialization process. Because the business idea is “your baby,” however, you are likely reluctant to let go of it so early in its journey. Instead, you may prefer the challenge of finding the money to bring your idea to market yourself.
We discussed earlier in this series the government funding that may be available for science and technology related research. Unfortunately, this source of funding does not pay for the expenses of commercialization. Thus, once you have maxed out your credit cards and fully drawn the home equity line your spouse warned you not to set up in the first place, you are likely to turn to the private sector to raise capital.
The drive to create something new and useful is an almost universal trait of entrepreneurs. This passion, however, is not always accompanied by the same enthusiasm for managing the more mundane tasks of taking an idea from a research lab or academia and making it available in the marketplace. In addition to the fundamental need to raise capital, the commercialization process requires a number of time-consuming and less glamorous steps, such as forming a company, hiring employees, establishing accounting systems, drafting contracts, securing appropriate facilities and, if all goes well, marketing and selling products and services. The process can often be frustrating, difficult and even infuriating at times, particularly for scientists or researchers. So, what can an entrepreneur, who wants to maintain her day job as a professor, physician or other professional but doesn’t want her valuable innovation to sit idle, do?
We discussed earlier in the Bench to Market series the selection and formation of the legal entity that will own the technology and carry on the business of the founders. In connection with this formation and prior to engaging with investors, contractors, and others, the founders of the new business should establish clearly the terms of the venture as between themselves. They need to consider carefully and come to agreement on the ownership, management, and other important aspects of the business. Ultimately, through their discussions and with the aid of an attorney, the founders should have a set of legal documents that completes the formation of the entity, reflects clearly and with precision the terms of the venture, and prepares them to operate the business in the market without disruption. Below is a summary of key terms of the venture arrangements that the founders of any new business should establish with each other.1
The competitive landscape can be a dangerous place for an early-stage entrepreneur, and even the best business plan can fall prey to imitators unless the entrepreneur is able to protect her business with some type of exclusive rights. Patents can provide powerful protection, and provisional patents are often a good choice for creating early-stage exclusivity. However, no business should overlook the potential value of trade secret protection.
There are two key issues to consider when evaluating trade secret protection: what type of information can an entrepreneur protect and what does she have to do to protect it? In general, any information can be a trade secret if (1) it is non-public information that has value because it is not publicly known and (2) the holder of the information is taking adequate steps to hold it in confidence. Trade secrets can include things as diverse as business plans, business contacts, financial analysis, inventions, formulas, designs and methods.
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Twenty-four hundred years ago, in the scroll age, the marketing guru Socrates observed, “Regard your good name as the richest jewel you can possibly be possessed of.” In the intervening years, only the technology of communication has changed; the wisdom of protecting your brand name and the goodwill it carries is still valid. For many of today’s businesses that are built on innovative products or services, such as those provided by many of the readers of The Genomics Law Report, the Internet and its social media are the most important methods of communicating with potential customers and collaborators.
Brand protection on the Internet begins with selecting and registering a “domain name.” Domain names are akin to virtual street addresses on the Internet, where the registry or “top level domain” is the name of the street and the string to the left of the “.” in the domain name is the ‘second level domain name.” Thus, “genomicslawreport.com” is the unique address for our site, consisting of the second level domain “genomicslawreport” registered on the popular “com” street. Anyone in the world can find us and no one else publishing there. We have grown jaded about this technological marvel, but a consequence of the domain name system is that every business should want to be sure that it preemptively registers domain names that support its brand and take reasonable and prudent measures to assure that others do not unfairly profit from the goodwill residing in that brand by registering domain names that impersonate, mimic or denigrate the brand or that sell counterfeit products under the brand name.
A great invention deserves a great name. When the time comes to market your game-changer, you can be sure of two marketing realities: copiers will race to build similar products, and purchasers will reward the product they remember. These two truths lie behind the adoption of the trademark iPhone® to identify Apple Inc.’s unique combination of music player and smart telephone and to distinguish it from other, similar products that now are marketed by Palm, RIM and other competitors. Because consumers know to ask for an iPhone® device by name, iPhone symbolizes and sustains the considerable goodwill that attaches to this category-creating product. The inner electronics of the device have changed repeatedly since it was first introduced, but consumers still associate today’s product with the original and its goodwill because of the consistent use of this trademark.