A Guide To IP Audits – What Are They And Does Your Startup Need One?

An IP Audit is a process which looks at the material IP owned and used by your startup. Most businesses will only carry out an IP Audit in preparation for a funding round or an exit, but the best time to start your IP Audit is at an early stage. This will help you to ensure that your startup owns or properly licences any IP which is material to it and will also inform your IP strategy, which may in turn add value to your business.

As well as helping you to develop your startup's IP strategy, an IP Audit can also be a starting point to set up a digital infrastructure (or "IP Bundle") which can be used to identify your IP Assets, list the contributors to your IP, evidence the ownership of IP through assignment agreements, detail licences in and licences out, record all disclosures and the confidentiality agreements put in place to protect the information disclosed. Maintaining and regularly updating your IP Bundle as your business grows will inform your future pitch decks, DDQs and disclosure letters giving third party investors and acquirors confidence that you understand the value of your business's IP and that you've looked after it.

An IP Audit will help you answer the following questions:

What are your IP Assets?

What is IP?

IP stands for "intellectual property" and it arises when a person creates something. Although IP isn't a physical asset, it can be bought, sold, mortgaged and licensed. There are different types of IP, the most common of which are: trademarks, copyright, database rights, trade secrets, design rights and patents:

• A trademark  is a distinctive sign capable of distinguishing the goods or services of one business from another. This might include your company name, business name and any other brands or logos which you use in your promotional material. 'Distinctiveness' is key. If a brand only describes the goods or services it is promoting, it is unlikely to be protected as a trademark. Trademarks can be registered with the UK Intellectual Property Office to give the owner of the trademark certain rights of exclusive use, but they can also exist unregistered.
• Copyright  is made automatically when an original work is created. It doesn't need to be registered, although it can be to evidence the date of creation. Most businesses will create copyright in the text and images on their website and marketing materials, in the software code they create or use and in any design drawings, reports, policies or written work owned, created, used or supplied by them.
• Database Rights, as with copyright, are made automatically when created. As the name suggests, database rights give the owner exclusive rights of use over particular databases – that is, data or other materials arranged in a systematic or methodical way and which is inpidually accessible. For many businesses this may take the form of marketing lists or databases of information behind an app, services or piece of software.
• Trade Secret(s)  can apply to any information controlled by a business that is secret  (i.e., information that is not generally known outside the business's organisation) and which has commercial value because of its secrecy, and which has been subject to reasonable steps by the business to keep it secret. A trade secret may take a variety of forms, such as a process, design, formula, recipe, or method of manufacture which may offer an advantage over competitors or which provides value to the business's customers.
• Design Rights  exist to protect the look and feel of a product. For design rights to exist, a design must be novel and possess inpidual character. Design rights are made automatically upon the creation of a design and they can also be registered. They may arise at the point of design, in the tooling  created by manufacturers to build a product and upon creation of the product  itself. They can also commonly be found in the layout of a business's website or marketing materials.
• Patents are rights which protect a novel and 'inventive step' with an industrial application. The rights given to patents arise only once a patent has been granted by the Intellectual Property Office, though there can be considerable value in having a 'patent pending' (which happens after application has been submitted but prior to any grant). A typical patent registration in the UK takes between 3 and 4 years, requiring 'prior art' searches to ensure that the inventive step is truly novel and no similar applications exist anywhere in the world. Patents are most associated with new inventions such as the electric lightbulb, Bluetooth and the telephone. However, it is also possible – though rare – to obtain a patent over a novel algorithm which produces a new and useful result.

What IP should be included in an audit?

Your IP Assets, meaning any IP which is material to the success of your business. It does not generally include IP in replaceable off-the-shelf software or products (such as IP in payroll or video conferencing software). 

Start the audit process by listing your startup's key assets such as: a business name, a product brand, get-up and strap lines, internal processes, methodology, manuals, website, apps, products or services designed, developed, manufactured or supplied, which are unique or otherwise vital to your business. This will help you to tease out the IP Assets connected with them and will form the starting point for your IP Bundle.

Remember that IP does not only cover IP that is registered with an authority, such as a trademark or a patent. It also covers unregistered IP like copyright, software, code, ownership of domain names, designs, know-how and trade secrets.

Who owns your IP Assets?

How can I find out who owns the IP Assets?

Once you have created a list of your startup's IP Assets, the next step will be to check whether or not those assets are owned by your business.

IP ownership will depend largely upon: who created it, under what terms and whether there been a written assignment. Generally, the following rules will apply:

• IP created by an employee in the course of their employment will automatically belong to their employer, though most investors and acquirors will ask you to point to the IP assignment clause in your employment contracts.
• IP created by a contractor or freelancer  will remain with the contractor or freelancer unless an assignment of IP has been agreed. Just because your startup pays someone to create, develop or write something for you, doesn't mean it will own the IP in it. If the IP has been assigned for a specific job, this will normally be dealt with in the terms of service, though the IP could be assigned in a separate assignment agreement.
• IP created by a founder will generally be owned by that founder personally, unless they have been engaged as employees and created the IP in the course of their employment, or they have agreed assign any IP created by them in a separate agreement. Terms of IP assignment might be included in their service agreement or in a standalone IP assignment agreement.
• IP created by a supplier or manufacturer  will remain with the supplier or manufacturer unless there is an assignment of IP. This will still be the case even if, for example a manufacturer commits to create tooling to manufacture your products or a supplier agrees to source and supply products configured to particular specifications. Copies of any contracts (redacted where required) which include assignment of IP wording should be collected and held together in your IP Bundle to evidence ownership.

What should businesses do if they don't own their IP Assets?

Some IP Assets can be hard to isolate and need to be looked at as a bundle of different rights. This is particularly the case for businesses with online offerings, whose websites, portals and apps likely to be comprised of in-house and third-party software and library code.

No business will own all of the material IP that it uses. However, for IP that's not owned, the important thing is making sure that you have the licence your business needs to use the third-party IP.

The risk with a licence is that, in most cases, it can be revoked or is subject to the licensor remaining solvent or continuing to support or update their component part. Where a particular IP Asset in whole or in part is unique to your business (such as its branding or an algorithm making the clever stuff happen in its public offering) ownership can make a huge difference to a valuation of your business. 

If you're worried that your startup doesn't own an important piece of IP that it uses then don't panic! Remember that it's always possible to assign IP after it has been created by having the owner(s) sign an IP assignment. In practice, this usually gets harder with time, as contractors go out of business, contributors can't be located, or a freelancer simply digs their heels in and puts a price on assigning the IP. The best time to manage the assignment of IP created by someone else is before you've paid for it.

Does your business have the consents it needs to use its IP Assets?

Does ownership mean I can do what I want with my IP?

Even if it's been established that your startup owns IP, an IP Audit will need to consider whether any restrictions apply the use of that IP

• Contractually, for example, your startup may grant someone else an exclusive licence to use its IP for a particular purpose. You might want to do this to secure the services of a particular distributor, if you enter into a joint venture arrangement, to focus on a key client in exchange for a guaranteed return or if you are granting security to a lender. 

Any contracts which impose restrictions or limitations on your business's right to use its IP should be kept and form part of your IP Bundle.

• Moral Rights are rights which attach to copyright. These rights include:

• the right to be attributed as the author
• the right to object to derogatory treatment 
• the right to object to false attribution
• the right to someone who has commissioned a photograph or a film for private and domestic purposes may also have the right to prevent the work from being exhibited to the public

Moral rights can't be assigned like other IP rights, but they can be waived. Waivers can be dealt with in IP assignments directly, or indirectly if the assigning party is a corporate entity.

Copies of any waivers of moral rights should be held together in your IP Bundle.

Where can I find the licence terms if I don't own the IP?

If your business doesn't own the IP it uses, it will need to think about how it uses the IP and whether it has the necessary licence to do so.

• IP created by a contractor or supplier for your business without the IP being assigned to it,  will typically be licenced on provisions set out in the supplier's or contractor's standard terms which you should be able to find by looking at their website or looking for a link on the quote or an invoice. Licence terms can vary enormously but generally include restrictions on reason for use, on the period of use (often for the duration of the contract, for a fixed period or revocable at will) and may require an ongoing royalty payment. Keep in your IP Bundle copies of the terms of agreement of any supplier or contractor who provides your business with services which are likely to include the creation or provision of IP.

• Implied licences. If an IP Audit is carried out a long time after the IP was created, it might be that no licence terms can be located, whether because there was no agreement in place or because the agreement was silent on IP. In that case, your business might  have what is called an 'implied licence'  to use the IP. However, this is a risky basis to use IP, as it is always possible that the third party who owns the IP in question will dispute the existence of that 'implied' licence. 

• Open source codes.  It's common for startups to use software that is provided online in source code format, which enables you to modify and develop the code. The licence terms for using open source code are usually referred to as 'open source' licences, which you can check by searching on the reference and version. Some open source licence terms allow you to do more or less whatever you want with the code. However, other open source code is provided on more 'restrictive' terms. The big one to watch out for is an obligation on you to release the source code of your own software if that software is distributed alongside, or includes, the original open source code - this obviously won't work for anyone wanting to keep their code confidential and proprietary to them! 

On what terms do you licence the use of your IP Assets to other people?

Licensing your IP Assets

Anytime you allow a third party to make use your IP Assets, you are granting them a licence. If you want to restrict use and build in protections for the IP Assets which you are making available, you need to make sure you have included the correct licence wording in the relevant agreements.

Your 'licences out' are likely to take various forms, such as licences:

• to use your brand for marketing purposes in agreements with your agents and distributors
• to use your design rights in agreements with your manufacturers, packaging agent and suppliers
• to use your services and products in your terms of business with your customers or another business as part of a joint tender, collaboration or joint venture
• to use your website in your terms of use

In an IP Audit, you need to list each instance in which your IP Assets are made available to third parties and make sure that you have the correct licence terms in place to enable you to make money from the IP while also protecting it from being misused, ripped off and otherwise infringed. 

Details of each licencing arrangement should be included in your IP Bundle, along with any version numbers and dates, so the terms of licence for a particular user at a particular time are clear.

Can you licence your IP Assets if they include third-party IP?

You can licence third-party IP if the licence granted to you allows you to do so. The only way to be sure, is by keeping records of all the third-party IP you use and the licence terms. The process of checking licences granted to you against the licences you grant is called 'back-to-backing'.

What are the risks to your IP Assets and what can you do about them?

Ultimately, this is the question that potential investors and acquirors will be asking since any valuation they give to an IP Asset will depend on how protected that asset is from being ripped off or misappropriated Typically, the risks to watch out for are:

• The ease with which someone could rip off your idea once you have made it public,  benefiting from the time and effort you have put in and taking your customers. The best protection against this is to make sure you have kept your IP under wraps until you are ready to go to market and once you have gone public, make sure you have registered your IP in the relevant jurisdiction as a deterrent.
• Failing to monetise your IP Assets by not having the correct licences in place.  You need to make sure that everyone granted a right to use your IP Assets does so under the terms of a written contract with a clear licence provision restricting their right to use the IP, giving you the control to terminate the agreement, and setting out the royalties payable.
• Being sued for breaching someone else's IP rights. Registering your IP is not just about asserting your rights, it can also be used to defend your rights if someone goes on the attack. Registration evidences ownership of rights from a specific date. An element of the registration process generally includes a review of what's already out there to make sure that nothing identical or confusingly similar has already been registered in that jurisdiction. This sharpens your awareness and can let you know from an early stage that you need to rebrand or take a design back to the drawing board.
• Failing to police or assert your IP rights in circumstances where they are being infringed.  Owning IP Assets comes with the added responsibility of having to assert your rights in circumstances where they are being unlawfully exploited by infringing parties. Failing to take action (or even delaying taking prompt action) can dilute the value of an IP Asset and even, in some circumstances, render them impotent in the face of future infringements.
• Failing to keep your trade secrets secret.  An essential characteristic of a trade secret is that the information remains secret. You therefore need to make sure that you can make the argument that your organisation has made efforts to keep your confidential information secret, such as: restricting access to the information; ensuring it is marked as confidential; making sure that that the information is only shared in confidence and that internal guidance documentation for employees (such as an internal employee handbook) promotes clear information safeguard policies and procedures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.