ENTR6053-Entrepreneurial Finance

Organizing and Financing a New Venture

Part II: Organizing and Operating the Venture

Chapter 3

Week 2 / Session 3
 Organizing and Financing
a New Venture

• Progressing through the Venture Life Cycle

• Forms of Business Organizations
• Choosing the Form of Organizations
• Intellectual Property
• Seed, Start up, and First Round Financing
Sources
 Forms of Business
Organization
• Sole Proprietorships
• Partnerships
– General
– Limited
• Corporations
– C corporations
– S (or Subchapter S) corporations
• Limited Liability Companies (LLCs)
3
 A summary of financial, legal, and tax
characteristics one should
consider when structuring a new venture
 Intellectual Property

• Intellectual Property: a venture’s intangible assets

and human capital, including inventions that can be
protected from being freely used or copied by others
• What Kinds of Intellectual Property Can Be
Protected?
– Patents
– Trade Secrets
– Trademarks
– Copyrights

5
 Intellectual Property

• Patents: intellectual property rights granted for

inventions that are useful, novel, and non-obvious
• Trade Secrets: intellectual property rights in the form of
inventions and information, not generally known to
others, that convey economic advantages to the holders
• Trademarks: intellectual property rights that allow firms
to differentiate their products & services through the use
of unique marks
• Copyrights: intellectual property rights to writings in
printed and electronically stored forms
6
 Patent Basics

• Intellectual property rights granted for

inventions that are “useful,” “novel,” and
“non-obvious.”
• Patents are granted by the U.S. Patent and
Trademark Office
• Patent law is very complex (you most likely
need to hire a patent applications specialist
lawyer)
7
 Four Kinds of Patents

1. Utility Patents: cover mechanical or general

inventions, chemical inventions, and electrical
inventions
2. Design Patents: cover the “appearance” of items (e.g.,
sports uniforms, electronic products, and autos)
3. Plant Patents: protect discoveries of asexual
reproduction methods of new plant varieties
4. Business Method Patents: protect specific ways of
doing business and the underlying computer codes and
technology
8
 Utility Patents:
Basic Information
• A new idea by itself cannot be patented
• The idea must be part of an invention that
has a “physical form” such as a product
• The physical form also can exist as a
sequence of steps contained in a process or
the delivery of a service

9
 Utility Patents:
Application Process
• Develop or conceive an invention
• Prepare (you, or a registered patent attorney
on your behalf) a patent application
• File the application in U.S. Patent and
Trademark Office
• If successful, the utility patent life will be 20
years (prior to mid-1995 the life was 17
years)
10
 Utility Patents: Provisional
Patent Application
• Beginning in mid-1995, inventors were permitted
to file a provisional application
• Filing dates can be established more quickly & at
lower costs, and small entities are charged lower
filing fees
• Allows the inventor to use the term “patent
pending” on the invention
• However, patent rights and protection occur only
when a patent is issued
11
 Provisional Patent Application
Requirements & Conditions

• An invention title, the inventor’s name,

residence, and address for correspondence
• Clearly written description and “drawings”
• A person skilled in the art of the invention’s
area should be able to use or practice the
invention
• Has a life of 12 months and will be abandoned
unless a regular patent application is filed
12
 Regular Patent Application
Requirements
• A detailed written description of the
invention and detailed drawings of how the
invention works
• One or more claims justifying why the
invention should be patented
• Inventor must indicate the “best use” or
method of practicing or carrying out the
invention
13
 Why Might Your Patent
Application be Rejected?
• For a patent application to be accepted, the
invention must be:
– Useful - the invention cannot just “do nothing”
– Novel - the invention was not previously
produced, described in a publication, or
patented
– Non-Obvious - invention should be “non-
obvious” to a person with ordinary skills in the
art of the invention’s area or subject
14
 Why Might Your Patent
Application be Rejected?
• Timing of filing the application
– must be filed within one year of first
introduction to the public
– in the future, it may be necessary to file prior to
any public disclosure or use

15
 What Does Having a Patent
do for the Inventor?

• The government does not enforce your rights

• The burden of enforcing the patent lies with
the inventor and enforcement can be costly
• Records indicate that over one-half of patent
infringement suits taken to court are not
upheld on behalf of the inventor

16
 Trade Secrets

• Trade secrets:
– intellectual property rights in the form of
inventions & information (e.g., formulas,
processes, customer lists, etc.)
• Trade secrets are not generally known to
others & convey economic advantages to the
holders

17
 Trade Secrets

• Why Consider Protection as a Trade Secret

instead of as a Patent?
– trade secret law can sometimes protect
inventions that did not qualify for patents
– some inventors want to avoid the detailed
disclosure required by the U.S. Patent and
Trademark Office
– there are no time restrictions on trade secrets (in
contrast to patents)
18
 Trade Secrets

• What are Drawbacks of Seeking Protection

under Trade Secrets Law?
– there is no formal procedure for obtaining
protection as a trade secret
– protection is established by the secret’s
characteristics and efforts to protect it
– holders do not have exclusive “rights” to what
comprises the secret (someone could
independently replicate the secret)
19
 Trademarks

• What are Trademarks?

– Intellectual property rights that allow firms or
others to differentiate their products and
services through the use of unique “marks”
• Marks allow consumers to easily identify the
source and quality of products/services

20
 Trademarks

• Most trademarks take the form of names,

words, or graphic designs
• Trademarks also can be on the shape of
packages, colors, odors, and sounds
• Trademarks are the most valuable form of
intellectual property for many firms
• A trademark should be suggestive of (but not
describe) a product or product line
21
 Trademarks

• How do You Obtain or Disclose a Trademark

(or ™)?
– no formal government procedure exists for
establishing a trademark
– ownership is established by being first to use the
mark on products
– a trademark can be lost if the mark becomes a
generic term or label (e.g., “aspirin” or
“cellophane”)
22
 Trademarks

• How do You Register a Trademark?

– a trademark can be registered in individual
states or with the U.S. Patent and Trademark
Office
– a federal registration should be used if a product
is sold in more than one state
– products with federally registered trademarks
show the trademark accompanied by ®

23
 Copyrights

• Intellectual property rights to “writings” in

written and electronically-stored forms
• Protects the “form of expression of an idea”
and not just words themselves
• Traditional way to establish a copyright is to
“publish” your book or other work
accompanied by a copyright notice using the
word “Copyright” or the symbol ©
24
 Other Methods for Protecting
Intellectual Property Rights
• Confidential Disclosure Agreements:
– documents used to protect an idea or other forms of
intellectual property when disclosure must be made to
another individual or organization
• Employment Contracts:
– agreements between an employer and employee
whereby the employer employs the employee in
exchange for the employee agreeing to keep
confidential information secret and to assign ideas and
inventions to the employer
25
 Seed & Startup Financing

• Financial Bootstrapping
– minimizing need for financial capital and finding
unique ways of financing a new venture
• Business Angels
– wealthy individuals who invest money in
fledgling ventures in exchange for the
excitement of launching a business and a share
in any financial rewards

26
 Source

• J. Chris Leach. (2012). Entrepreneurial

finance. 04. South-Western College
Publishing. Mason, OH USA. ISBN:
9780538478151 (Chapter 3)
Thank You