In regional economies facing rapid structural change, like the Hunter Valley and Central West of NSW, innovation is central to economic planning.  In this article, James Stevenson and Ryan Gray consider how regional businesses can make the most of the Government’s Innovation and Science Agenda. 

It is commonly stated that innovation will be one of the keys that unlock Australia’s future success, competitiveness and productivity.[1]  In regional economies facing rapid structural change, like the Hunter Valley and Central West of NSW, innovation is central to economic planning.

The Australian Government has announced funding for new technologies and is planning to introduce new laws designed to assist start-ups and promote innovation.[2]  So how do regionally-based businesses, entrepreneurs and investors become involved and make the most of the ‘ideas boom’?  From a legal perspective we think, like many things, it is all about preparation and seeking genuine expert advice early in the process.

At McCabes Newcastle we are proud of our enviable track record for providing regional clients with timely expert advice in connection with the commercialisation and funding of innovative products, processes and business initiatives.  We think the renewed focus on innovation provides an exciting platform for change and the development of regionally based businesses.  Like all things, however, it is vitally important that those seeking to take advantage of this renewed focus do so in a disciplined and methodical way that does not lose track of fundamental legal and business “ground rules”.

Consider the following profile of a McCabes client (facts modified and simplified to protect client confidentiality):

  • A client, TechCo, is privately owned by a technology expert.
  • TechCo has developed (and is continuing to develop) a series of products in an industry segment that satisfies specific government, consumer and corporate customer needs.
  • TechCo initially partnered with a university, entered into a collaboration agreement, then a commercialisation agreement and finally jointly applied for an ARC Linkage Grant (providing Australian government support for the development of key intellectual property).
  • In addition TechCo developed its own product specific intellectual property which became the subject of both patented and confidential information owned by the enterprise.
  • There are no Australian competitors in the market that sell the products that have been developed by TechCo (or any similar products).  International substitutes are expensive, slower and offer ‘lower tech’ solutions.
  • Most of TechCo’s products are still undergoing development and testing, however, TechCo has now entered into a long-term contract for the supply of a significant quantity of a particular product line to a large foreign entity.

Applying this case study, here are some of our tips that might assist you during the development and commercialisation of your business ideas:

1. Protect your intellectual property rights – Seek legal advice as early as possible in relation to an IP protection strategy that suits your needs. For example, should you register your intellectual property (e.g. on IP Australia’s patent or trademark register)?  How do you protect a trade secret?  The answers to these types of questions are critical as once you begin to commercialise your idea you may have already gone too far to be able to protect any intellectual property (or ownership) rights (and, therefore, value) in that idea.

TechCo adopted a two-pronged strategy to IP protection:  It registered some intellectual property rights (including patent rights developed in association with a University) but opted, for various tactical reasons, against registering or publishing other ideas.  Instead, TechCo is proceeding with a contractual trade secret protection strategy coupled with very strict confidentiality and IP protection policies.  Importantly, only a very small number of trusted persons have access to the key information.

2. Commercialisation – One of the key barriers facing entrepreneurs is converting a good idea into a product or service that the market demands. It is important to do your research, approach the right advisors at an early stage and establish a network of people who can help move your ideas forward.

TechCo has a long-standing relationship with a major research University and has entered into exclusive licensing and commercialisation agreements allowing TechCo to use and develop intellectual property developed by (and in conjunction with) the University.

McCabes’ network of contacts were advantageous to TechCo.  We were able to introduce potential business partners, collaborators and international connections to assist TechCo to expedite commercialisation of its IP.  We are known for building connections for our clients.

3. Governing documents – Put in place appropriate ‘ground rules’ between you and your co-investors. Start with good non-disclosure and IP protection documentation then move early to a shareholders’ deed (companies), partnership deed (business partners) or similar document that deals with issues such as the funding, management, and the agreed direction of the business, as well as outlining the responsibilities and obligations of owners.  You should also consider an appropriate business succession plan and exit.

TechCo commenced as a sole director / secretary / shareholder entity.  As a result of initial venture capital, it has now significantly grown to a multi-shareholder company with a number of directors (executive and non-executive).

McCabes advised on the Australian law aspects of the initial capital raising (offers were made in Australian and the US).  We introduced potential investors in Australia and suitable advisors in the United States.  We prepared Australian offer documentation, loan and subscription documentation and an initial shareholders’ deed that sets the key ‘ground rules’ between each investor in the company, including how the company is to be governed.

For an innovative privately owned business, the biggest change came with the introduction of a new investor and its representation on the board.  It is vitally important that entrepreneurs invest time to understand and assist in carefully drafting “ownership rules” (as they appear in a shareholders’ deed or similar document) and embrace the changes that come with improved corporate governance that flows from the introduction of such documents.

4. Basic house-keeping – Make sure you get the basics right as early as possible. Taking simple steps such as registering your business name and preparing a pro-forma confidentiality agreement are critical.

TechCo engaged McCabes very early to prepare and negotiate contracts with service providers, key suppliers, customers and other important contacts.  As these contacts were often provided with company-owned specifications or other elements of TechCo’s knowhow and intellectual property, an integral aspect of most documents we prepared was “IP ownership” and confidentiality.

Putting in place appropriate documentation with key contacts will not only protect your interests throughout the development stages but will place your business in an improved position should you decide to exit or sell the business at a later date.  Playing “catch up” on these matters later can prove time-consuming and costly.  You may find it is not possible to secure exclusive rights if you do not address these issues before growing the business.