Why Intellectual Property is a Critical Asset for Israeli Startups
An Israeli tech startup developed an innovative data analytics platform and approached investors for Series A funding. During due diligence, it emerged that the company had not filed patents for its core algorithm, failed to protect its trademark, and lacked proper documentation of intellectual property rights in development work. The result: significantly lower valuation and less attractive investment terms.
In the Israeli startup ecosystem, intellectual property often constitutes the overwhelming majority of a company's value. For technology companies, the code, algorithms, brand, and technical know-how are the core assets - far more than physical assets or traditional inventory.
Experienced investors know how to evaluate the strength of an intellectual property portfolio. A startup with strong IP protection is not only protected against copying, but also creates a sustainable competitive advantage that translates to a valuation premium. Conversely, a startup with IP weaknesses may discover that its technology can be easily replicated by competitors with deeper pockets.
Patents: When, How, and What to Register
Filing a patent application is a complex strategic decision that requires consideration of technical, legal, and economic factors. In Israel, patent protection is governed by the Patents Law, 5727-1967, and the Patents Regulations.
Identifying Patentable Inventions
Not every technological innovation can receive patent protection. An invention must meet three criteria: novelty (not known to a person skilled in the art), inventive step (not obviously derived from existing knowledge), and industrial applicability. Algorithms, business methods, and pure scientific discoveries generally cannot be patented, but specific technological applications of them can.
For technology startups, subjects worth examining for patent registration include: algorithms implemented in specific hardware systems, data processing methods with unique technical applications, innovative user interfaces with special technical features, and new communication or security protocols.
Filing Timing
In the startup race, timing is everything. Filing a patent application too early may expose immature ideas, while filing too late may lose the competitive advantage or allow competitors to file first. The golden rule: file a patent application after developing a working prototype, but before public or commercial disclosure of the product.
Many Israeli startups begin by filing a patent in Israel (at relatively low cost) to establish a priority date, then file applications in the US, Europe, and other countries under the Paris Convention or PCT, which allow maintaining the Israeli priority date.
Economic Considerations
Patent costs can reach tens of thousands of dollars across multiple countries, including registration fees, representation fees, and annual maintenance fees. Startups need to balance desired protection against available resources. Sometimes, deciding to file patents only in key markets (US, Europe) may be more practical than extensive global filing.
Building a Protected Brand: Trademarks and Trade Names
A startup's brand is often the most customer-recognizable asset. Strong trademark protection not only prevents unauthorized use but also creates a commercially valuable asset that can be transferred, licensed, or serve as collateral for financing.
Smart Trade Name Selection
Before investing in trademark registration, it's crucial to ensure the name is available for use and registration. Thorough checking includes searching the Israeli trademark database, checking company name registrations, and searching internet domains. Beyond legal availability, it's important to choose a name that can be protected - overly descriptive or generic names are difficult to protect.
A good startup name should be memorable, easy to pronounce in multiple languages (especially important for Israeli companies targeting international markets), and unique enough to stand out in the competitive environment. Avoid names that are variations of well-known brands - even if they're in different fields.
Registration Process in Israel
Trademark registration in Israel is conducted through the Trademarks Registrar at the Ministry of Justice. The process includes filing an application with mark details, classifying products or services according to the Nice system, and paying required fees. Current information on fees and requirements is available on the Trademarks Registrar website.
After filing, the Registrar examines the application formally and substantively. If there are no objections, the mark is published in the Official Gazette for three months during which third parties can oppose. Absent justified opposition, the mark is registered and valid for ten years with renewal options.
International Protection
Israeli startups planning international activities should consider trademark protection in key markets early on. The Madrid Protocol allows relatively efficient international registration in multiple countries with one application, while separate registration in each country provides more control but requires greater investment.
Remember that trademark rights are territorial - Israeli registration provides no protection in the US or Europe. Early planning of international protection strategy saves costs and prevents issues with domain squatters or competitors who might "grab" the name in foreign markets.
Protecting Code, Content, and Trade Secrets
While patents and trademarks require explicit registration, copyright and trade secrets exist under law even without formal steps - but effective protection requires careful planning and implementation of protection procedures.
Copyright in Code and Content
Copyright protects the original expression of ideas - source code, documentation, interface designs, marketing content, and more. In Israel, the Copyright Law, 5768-2007, provides automatic protection for any original work from the moment it's fixed in tangible form.
For startups, it's crucial to clearly document who developed what and when. Maintaining versions in control systems like Git not only aids development but also creates documentation of creation dates and authorship. In case of disputes with former employees, contractors, or partners, meticulous documentation can be critical.
Using open source code requires special attention to various licenses. Some licenses (like GPL) require releasing all code that uses the library under the same license, which can harm the startup's ability to protect its intellectual property. Code review procedures should include checking open source licenses.
Trade Secret Protection
Trade secrets include any commercially valuable information not accessible to the general public: unique algorithms, databases, customer lists, unique work methods, and even future development plans. Unlike patents, trade secrets can be preserved forever - but only if their secrecy is maintained.
Effective trade secret protection requires strict information security procedures. This includes confidentiality agreements with anyone exposed to sensitive information, restricting information access on a need-to-know basis, and encrypting sensitive data. It's especially important to ensure external contractors and advisory boards sign binding confidentiality agreements before exposure to core technology.
In the modern work environment, where employees work from home and use personal computers, trade secret protection is more complex. BYOD and remote access policies must balance convenience with information security.
Ensuring Ownership of Employee and Contractor Developments
One of the most common legal issues in startups concerns ownership of creations and developments made by employees and contractors. Without explicit and early contractual arrangements, a startup may discover it doesn't own exclusive rights to the technology on which it's based.
Rights in Employee Developments
Under Israeli copyright law, a work created by an employee in the course of employment generally belongs to the employer - but the definition of "in the course of employment" isn't always clear. An employee who developed an innovative solution in their private time, on their home computer, but using knowledge acquired at work, creates a complex legal situation.
Employment agreements in startups should include detailed "work assignment" clauses clarifying that any development related to the company's field of activity, even if done outside work hours, belongs to the company. However, it's important to balance this with employees' legitimate right to retain personal creations unrelated to the business.
A special situation arises with founders who became employees after investment rounds. Their copyright in previous developments should be explicitly assigned to the company as part of founders' agreements or new employment contracts.
The Contractor and Freelancer Challenge
The issue is even more complex with independent contractors. Absent other agreement, copyright in work done by a contractor remains with the contractor, even if the startup paid for it. This can create a situation where the company pays for development but doesn't own full rights to it.
Contractor agreements must include explicit assignment of all intellectual property rights to the startup. This includes not only the final product but also intermediate code, documentation, and any derivative works. It's recommended to include a clause requiring the contractor to assist in future patent or trademark registration procedures without additional payment.
Outsourcing to foreign companies adds another layer of complexity. Intellectual property rights are subject to the laws of the country where the work was created, and enforcing international agreements can be complex and expensive. Using established outsourcing companies with confidentiality agreements and IP insurance is recommended over working with private freelancers.
Organizing the IP Portfolio for Investor Review
The legal due diligence process is the moment of truth for a startup's intellectual property portfolio. Experienced investors know how to identify weaknesses and gaps that could affect valuation or even lead to deal cancellation. Early and comprehensive preparation can save valuable time and avoid unpleasant surprises.
What Investors Look For
Investors examine several key aspects of the intellectual property portfolio: clear and explicit ownership of all IP assets, absence of violations or obligations to third parties, appropriate protection of core assets (patents, trademarks, trade secrets), freedom to operate without infringing others' rights.
The investor also wants to understand the strategy: how does the company plan to protect its competitive advantage? Is there a plan to expand the patent portfolio? How does the company deal with IP threats from competitors? Clear and informed answers to these questions indicate professional management.
Organizing the Due Diligence Folder
The due diligence folder should be organized and accessible well before an investor requests it. Basic documents include: all copyright assignment agreements from employees, founders, and contractors, registration certificates for patents and trademarks, confidentiality agreements with all parties exposed to trade secrets, copyright registrations (if made), Freedom to Operate analysis identifying third-party patents that could affect the company.
Every document should be clearly labeled with dates and descriptions. If there are gaps or documents signed retroactively, it's worth preparing an explanation and documentation of what was done to fix the situation. Transparency about known issues is generally perceived better than concealment that's discovered during due diligence.
Addressing Common Gaps
Common gaps that can and should be fixed before due diligence include: founders who haven't formally assigned their rights to the company (can be fixed with retroactive assignment agreement), early contractors without rights assignment agreements (sometimes solvable with retroactive agreement), use of open source code without meticulous license documentation, lack of confidentiality agreements with consultants or business partners.
In some cases, the company won't be able to fix the gap (for example, a former contractor who's unavailable or refuses to sign an agreement). In such cases, it's important to document the efforts made and prepare a professional risk assessment.
Protecting Intellectual Property in International Markets
Most Israeli startups target international markets from early stages. The intellectual property protection strategy must account for this and balance the desire for broad protection against the limited resources available to a startup.
Selecting Priority Markets
Not every startup needs to file patents in 50 countries. A smart decision starts with understanding key markets: where are the potential customers, where are the main competitors, and where is product manufacturing. For most Israeli startups, basic markets include Israel (as starting point), US (the large market), European Union (especially important for B2B), and China (especially if there are copying concerns).
Phased planning can help spread costs over time. Initial filing in Israel creates a priority date at low cost, then the company can decide on additional filings based on product progress and market feedback.
Collaborations and Licensing
Internationally operating startups should consider not only how to protect their intellectual property, but also how to use it as business leverage. Technology licensing can enable rapid penetration into foreign markets without direct investment, while other startups may prefer full control over the technology.
Establishing subsidiary companies in key markets can affect IP strategy. Patents registered under an Israeli company name may be subject to Israeli regulation on technology export, while patents registered under an American subsidiary name may be more flexible for international transactions.
Special Considerations for Sensitive Technologies
Startups operating in cybersecurity, defense technologies, or security fields may encounter regulatory restrictions on registering and licensing their technology. In Israel, MALMAB (Defense Ministry Security Authority) has authority to require export licenses for certain products or technologies.
In AI and social impact fields, both the European Union and US are developing regulation that may affect registration and use of certain technologies. Startups in these areas should consult with professional advisors already in product planning stages.
Converting Intellectual Property into Valuable Business Assets
Intellectual property isn't just a protective tool - it's a business asset that can contribute to company value, open new business opportunities, and serve as leverage in negotiations with partners and investors. Unlike physical assets, intellectual property can grow in value over time if managed correctly.
Value Metrics for Intellectual Property
Valuing intellectual property in a startup isn't an exact science, but there are metrics investors use: potential market coverage (patents protecting large markets are worth more), strength of protection (patents that are hard to work around are more expensive to replace), proximity to business core (protection of the main product is worth more than peripheral patents), and monetization ability (can the technology be licensed to others).
Smart combination of different protection types can increase overall value. A patent protecting the algorithm, a strong trademark identifying the brand, and trade secrets protecting the data, together create a competitive "moat" that's difficult to cross.
Active Portfolio Management
An intellectual property portfolio is living and breathing - it requires maintenance, updates, and adaptation to company development. Patents that were relevant at one stage may become less important as the product evolves. Conversely, new areas the company enters may require new protections.
Monitoring competitors is an important part of portfolio management. What patents are they registering? Is there danger they'll be sued for infringing your patents? Have they developed solutions that circumvent your protections? Answers to these questions can lead to decisions about filing additional patents or changing development direction.
Preparing for Exit or Sale
Even if it seems far off, thinking about exit strategy can influence IP decisions today. A company preparing for IPO needs a strong and clean portfolio, while a company targeting acquisition by a large player can focus on patents that would be attractive to potential acquirers.
In some cases, the acquiring company is more interested in patents as "defensive tools" against other litigants than as technology for their own use. Understanding potential acquirers' motivations can lead to smart decisions about which patents to file and in which countries.
Concrete Steps for Implementation Before Fundraising
The challenge for most startups isn't lack of understanding of intellectual property importance, but difficulty translating that importance into practical steps within a startup's timeline and budget constraints. Here's an action plan translated into practice that suits startups at different stages.
Phase A: Basic Audit and Assessment (3-6 months before fundraising)
Start with a comprehensive review of the current situation. Gather all employment agreements of founders, employees, and contractors. Identify who developed what and when. Check if there are explicit copyright assignment agreements with everyone who contributed to developing core technology.
Create a list of all company intellectual property assets: source code, algorithms, databases, interface designs, marketing content, trademark and logo. For each item, document who created it, when, and the existence or absence of an assignment agreement.
Check open source code usage. If you're unsure what licenses are in your code, use automatic license identification tools or order professional review. Identify "dangerous" licenses that might require releasing your code.
Phase B: Closing Critical Gaps (2-3 months before fundraising)
After identification, start closing the most serious gaps. Contact current founders, employees, and contractors and sign updated rights assignment agreements. In most cases, people working with the company will be willing to sign, especially if it's explained that this is crucial for fundraising.
For gaps that can't be fixed (former contractors who can't be located or refuse to cooperate), prepare documentation of efforts made and assess risk severity. Sometimes it's acceptable to live with small risks if they're properly documented and explained.
This is also the time to decide on patent filing if you have creations suitable for it. Remember the patent process takes time, so even if you don't finish getting a registered patent before fundraising, merely filing the application indicates seriousness.
Phase C: Preparing Due Diligence Folder (month before fundraising)
Organize all documents in an accessible and orderly digital folder. Every important agreement should be scanned in a separate file with a clear name. Prepare an index explaining what each document is and when it was signed.
Prepare a one-page summary document explaining the company's intellectual property strategy: what patents were filed or planned, how you protect core technology, and what your international strategy is.
If there are known issues or gaps you couldn't fix, prepare a clear explanation of the situation and steps taken to address them. Transparency is preferable to concealment that will be discovered during due diligence.
Planning Ongoing Maintenance
Fundraising isn't the end of the road - it's just the beginning. After successful investment, it's important to continue developing the intellectual property portfolio. Set an annual IP budget (usually 2-5% of revenue or investment), appoint a person or external company for ongoing portfolio management, and establish quarterly review of patent and trademark decisions.
Remember that intellectual property is a long-term investment. The patent you file today will give you protection for the next 20 years, and the brand you build now can accompany you throughout the company's lifetime. Investing time and resources at this stage will pay off multifold in the future.
The information contained in this article is general in nature and does not constitute legal advice. For advice tailored to the specific circumstances of your company, we invite you to contact our firm.
