1. Check employment and independent contractor agreements

Look at your employment agreements — and agreements with independent contractors — to make sure that they have an obligation to assign their rights in any inventions that they develop in the course of their work to your company.  If their agreements with you don’t explicitly obligate them to hand over those inventions, it may be difficult for you to obtain a patent on them, particularly if that employee or independent contractor no longer works for you.

2. Circulate an Information Disclosure Form

The first step to getting a patent is identifying ideas that are potentially inventive and patentable. Learning about and understanding your employees’ inventions as early as possible will enable your patent lawyer to draft earlier applications with more accurate and comprehensive disclosures, which means stronger patents. No need to reinvent the wheel—ask your outside patent lawyer (get a referral from your corporate lawyer or VC if you don’t have one) for a PDF form and send it to your team.

3. Create a “patent team” to quickly review new inventions

Once your employees start filling out Information Disclosure Forms, you need to figure out whether these new developments are worth patenting. It’s best to include a diverse set of people in this discussion—a person from management (it can be a founder/CEO but just as often is a CFO), engineering, and marketing/sales, at a minimum. It’s important to keep the marketing and sales folks in the loop on patents because they often are the first to disclose new inventions outside the company. When your patent team agrees that a particular development is worth patenting, contact your patent attorney so that he or she can determine whether it is indeed patentable and, if it is, to prepare and file a patent application.

4. Give cash incentives for patented inventions

Sometimes your team may need a bit of encouragement to think about whether their product development is also generating patentable inventions. You may want to consider good old-fashioned financial incentive, in the form of bonuses paid when a patent application is filed and when that application matures into an issued patent.

5. Keep it all organized

Once you have started to seek protection for your patentable inventions, it’s important to keep everything organized so that you know what IP you have. Keep copies of your IP-related documents (e.g., employment/contractor agreements for inventors named in your patent applications, the Information Disclosure Forms, issued patents, technology licenses and other contracts) in a well-organized file. This can be as simple as a folder on your computer with chronologically ordered PDFs, or a sophisticated document management system — what’s important is that you have this information within easy reach for when a potential investor wants the due diligence on your IP.

Nitin Gupta is a Co-Founder of LawPivot, an online marketplace for businesses to receive crowdsourced legal advice from lawyers. Eric Hutchins is a patent attorney at the law firm of Kilpatrick Townsend & Stockton LLP in Menlo Park, California.

 Image courtesy of Flickr user Alexandre Dulaunoy.

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Valuation. Valuation. Valuation.

Valuation is perhaps one of the biggest traps in a term sheet. Valuation means what the value of your company is before you accept the investment. A valuation that is too low is one an entrepreneur will soon regret. Essentially, you have given too much of the company to the investors relative to their investment dollars. On the other hand, a valuation that is too high may cause future investors to avoid a “pricey” deal. The solution is to do your homework by studying similar deals and consulting folks in the venture industry, as the valuation of private companies can be a “black art.”

Resetting vesting.

Look out for the fist in the velvet glove. Investors have a strong interest in imposing incentives on entrepreneurs to stay fully committed. One dial that they love to tweak is your vesting schedule. A typical vesting schedule will be based on a four-year time period, in which your shares vest monthly in 1/48 increments of total shares. Often entrepreneurs are well into their vesting by the time money is within sight. Investors, however, want to make sure there is enough runway to keep the founders motivated all the way through an exit. Be prepared to be flexible, but keep what you have fairly earned in terms of equity.

Liquidation preferences.

Ignore this at your peril! The liquidation preference is the part of the exit consideration that the preferred stockholders get in preference to the common stockholders (that means you!) upon an exit. A high liquidation preference formula can leave entrepreneurs out in the cold or greatly reduce what they receive upon exit of the company. Liquidation preference provisions come in many flavors and seemingly slight differences in the wording can have a huge impact. The best one to hope for is a non-participating 1x preference.

Protective provisions.

What are protective provisions? They are a series of promises about things that a company will not do without the consent of their investors, including raising a future financing round, changing the bylaws or certificate of incorporation, or selling the company. These protective provisions are considered “negative” controls because they prevent the company from doing something but cannot be used to force the company to do something. If there are too many conditions or they are too restrictive, the company can find its ability to make decisions greatly reduced.

Expanding the option pool.

Investors will often insist that a company greatly expand the size of its stock option pool on a pre-investment basis. While this is to be expected to some extent, make sure that your option pool does not get too far above norms (20 percent or lower of the fully-diluted capitalization is a normal range). Practically speaking, the size of the option pool should be no greater than the amount of equity incentives for employees that are needed to get to the next round.

Jay Mandal is the co-founder and CEO of LawPivot, an online marketplace for businesses to receive crowdsourced legal advice from lawyers.

Yusuf Safdari is an attorney from Pillsbury Winthrop Shaw Pittman LLP who provides advice on LawPivot.

Image courtesy of Flickr user Steve Rhodes.

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As LawPivot — which is similar in design to crowdsourcing services such as Quora or LinkedIn Answers but focused on legal advice — continues to grow, it could help lead a movement toward true Knowledge as a Service.

Cloud computing helped introduce us to the concept of everything — infrastructure, platforms, software, etc. — as a service, and I argued several months ago that human Labor as a Service, obtained via web tools, might well fall under the cloud umbrella, too. The idea is that things that once required capital investment and, perhaps, long-term commitments are now available over the web on an ad hoc basis. But whereas LaaS focuses on fairly commodity tasks such as proofreading or bug-testing and the human workers resemble nodes in a computing cloud, a service like LawPivot focuses on providing knowledge, rather than just labor, as a service.

Continuing the computing analogy, services like LawPivot might be compared with specialty or enterprise clouds targeting users with specific needs around security, compliance or performance. When companies seek advice from the lawyers that comprise LawPivot’s knowledge pool, they’re asking specific questions in specific practice areas, often relating to the specific laws of the state where the companies are based. Beyond the bar licenses required to give legal advice in the first place, the subject-matter expertise requires years of experience in any given field. To have this type of knowledge available via a web-based service is very valuable.

Further, LawPivot represents a change in the economics of the legal field similar to how cloud computing services such as Amazon EC2 helped free companies from burdensome IT contracts and provisioning processes. In the Information Age, where even legal information is readily available and usable on the web and via certain non-legal specialists, such as CPAs or real estate agents, the hefty retainer fees and hourly billing that have come to embody legal services will no longer cut it, especially for small, cash-strapped businesses. LawPivot, through which lawyers demonstrate their worth first before hopefully establishing a long-term relationship, is part of this larger trend.

The cloud computing connection doesn’t stop with the delivery of knowledge as a service, though. As we’ll be discussing later this month at Structure 2011, the cloud, as a new delivery model, brings about its own set of legal concerns ranging from availability to data privacy. Certainly, more than a few startups should have questions about what avenues of liability cloud computing might open them up to.

As part of the BizSpark partnership, LawPivot is also utilizing the data it has collected about clients to help point new clients in the right direction. As Co-Founder Nitin Gupta explained to me via e-mail:

Through our search algorithm, LawPivot learns about the companies and lawyers on our system over time.  We then use past and present data on users and trends to provide a company the best lawyers on LawPivot to answer its question based on the company’s specific needs, and also provide companies the best questions to ask and legal issues they should look out for.  We will be providing data such as the types of companies using LawPivot, the types of legal questions/issues they have and might have, and the types of lawyers that certain types of companies are working with.

The advent of Everything as a Service is a fascinating trend to watch. First it was IT resources and processes, then it was human labor, and now it’s moving into specific areas of knowledge. All are still very new and no doubt will evolve greatly in the years to come, possibly fundamentally altering the ways we think about obtaining everything from servers to employees to lawyers.

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