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With Kickstarter – one of the best-known crowdfunding platforms – attracting USD529m (~€478m) in pledges last year, crowdfunding has emerged as an attractive model for start-ups to raise the capital needed to finance new projects. But the practice inevitably leads to a project being released into the public domain: how can you get funding without taking your project to the crowd? So what are the implications of crowdfunding a startup?
Being copied, particularly by an established competitor that has the capability to readily do so, is a primary concern for most start-ups – first-mover positioning becomes less of an advantage when competitors rapidly enter the market and close the gap on you or even displace your market share. Making moves to protect any intellectual property underlying your project can safeguard the exclusivity of your project (which, in itself, can also garner premium pledges from the crowd) and will ensure that you are in a position to defend your market share after your project launches. However, the public disclosure of your project could mean that you jeopardise your chances of securing valid intellectual property protection. By placing your project on a funding platform, the project becomes part of the public domain and intellectual property protection such as patent and design protection are no longer a viable option – assessing the patentability of your technology or whether the appearance of your design can be registered, before launching a new campaign, could let you have your cake and eat it by allowing you to protect your project and to also source from the crowd. In a similar vein, trademark searching will ensure that you are not liable to having to change your brand during or after your campaign – essential given that most campaigns are recognised by the project brand.
But not all platforms offer the same rewards, and not all initiators are seeking the same return. Some platforms are based on sourcing guidance rather than (or at least as well as) finance. Having the crowd aid the evolution of your project can be an invaluable resource sought by a number of start-ups, but there are ownership issues to be managed when someone comes on board to direct project development. You should be aware that anyone making an intellectual contribution to your project could be entitled to ownership of (at least part of) the project. Ensure that you protect early and have established (contractual) obligations regarding the ownership of intellectual property for any person involved in the development of your project – so that you don’t unwittingly give away more than you expected.
Another consideration for anyone entering into the practice of crowdfunding is the infringement of third party intellectual property rights. Although start-ups are constantly concerned with a project being copied, the issue of whether commercialisation of a project will infringe other rights is rarely addressed. Crowdfunded projects are more regularly becoming a target of infringement actions as start-ups are putting technology, brands, and designs onto the market without exercising due diligence to determine whether infringement is a possibility. Regardless of whether you are entering into a rewards or equity-based crowdfund, the commercial dissemination of a given technology could constitute the infringement of a patent. Likewise, project initiators could find themselves the subject of a trademark infringement lawsuit if using a registered trademark (or even something similar) for goods/services covered by the registration. You should also be aware that the appearance of a product could be protected by a design registration and that using that design could see you defending a claim for design infringement.
Despite the fact that crowdfunding has undoubtedly generated meaningful finance for some projects – Star Citizen, an online video game, claims to have grossed over USD82 million from the crowd – there are hazards associated with the very nature of the practice, with one of the more compelling issues centring on the possibility of jeopardising valid intellectual property protection – you can avoid this risk by assessing and protecting any intellectual property associated with your project before you launch your campaign. Ownership also comes into question when you involve the crowd with the development of your project, so take steps to ensure you are in control of proprietorship. You might also benefit from assessing the likelihood of infringing third party rights before you participate in crowdfunding, because the last thing you want to receive from the crowd – is a lawsuit.