What Every Founder Must Know About Patents

Intro 00:01
Jeff, welcome to Startup Success, the podcast for startup founders and investors. Here, you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world, stories that will help you in your own journey. Startup Success starts now.

Kate 00:18
Welcome to Startup Success. Today we have Jeff Schox, who is the founder of Schox Patent Group, a boutique patent firm that specializes in startups, with us today. Welcome Jeff.

Jeff Schox 00:31
Thank you, Kate. I’m glad to be here.

Kate 00:33
We’re really excited you’re here because we haven’t covered patents on the show yet, but we know they are so critical to the success of so many startups, and if not handled correctly, they can have long lasting implications that aren’t always positive. So I’m super excited to talk to you. Before we get into patents, it’s always helpful, if you wouldn’t mind giving the audience just a brief overview of your background and the founding of your firm, Schox Patent Group, that would be helpful.

Jeff Schox 01:11
Would love to. Like all patent attorneys, I’m an engineer first. I studied Mechanical, Electrical and Computer Science degrees from University of Michigan. Grew up outside of Detroit. I thought I was going to be an automotive engineer, and did a couple summers, worked on the electric vehicle back at GM, back in the 90s. And so it was like, I need something different than working as one person out of 10,000 and my mentor said, go into patent law, and that’s what I did. And went off to law school. After law school, I came back to the Michigan area and worked for a couple of very large Midwestern patent law firms, 100-200 people, you know, type of thing. And I was on track to be one of the youngest partners at this 150 year old firm. And I looked around and I said, you know, everyone’s thinking of partner as a noun, as a destination, and I kind of think of it as a verb, like, do I want to partner with these folks? And the answer was no. So I had really no idea what I was going to do next. You know, none of the folks in my family are particularly entrepreneurial, but I had written in a journal like, what would I do if I was in charge? You know, kind of like a rant journal. And so there was a particular day that I grabbed it, left early and went to a coffee shop and said, I think this is the day that I start my own firm. (Wow.) That was about a little over 20 years ago. My wife and I moved out to the Bay Area in 2004 and didn’t know anyone in the state of California. So it was really kind of terrifying to start a professional service firm. I hustled for many, many years. And then, like a lot of successes, you know, it came kind of overnight, and then all of a sudden we had, you know, hundreds of companies come to us every year. We have about 20 or 30 slots that we take. We have about 100-120 clients total, and they usually stick with us for about four or five years on average. And so in some ways, it looks a little bit more like a venture fund of sorts. Kind of pick and choose the clients that we get to work with and and actually often make investments in those as well.

Kate 03:18
Wow. What a story. And it sounds super rewarding. You must love it, and you must be so happy you took the risk.

Jeff Schox 03:26
There were quite a few along the way, and plenty of family and friends kind of had the like mini-interventions, you know, taking me out to dinner, just like, do you know what you’re doing, because this sounds insane, like you have your life all set up for you. What are you doing? I had a great life partner and very patient, and so it all worked out. Love what I do?

Kate 03:49
Yeah, it definitely worked out. Wow, that’s a great story. Okay, good. Well, I think you’ve definitely established your expertise then with the audience around startups, which is great. And one of the things you know, we spoke briefly before this podcast, and you talked about the three myths of startup patents, and I found it fascinating, so I want to delve into that right away, because I know our listeners will as well. So if you wouldn’t mind just walking us through each one with some examples that would be really helpful.

Jeff Schox 04:25
Yeah, of course, (4:27) one of the myths that I think a lot of folks, especially in software as a service, think is that software isn’t patentable, and in some ways they’re right. You know, 60, 70, 80% of the time what we’re doing in software isn’t particularly innovative. It’s, you know, putting a couple of pipes together or modules together. And so there’s not patentable subject matter in a lot. But a good vast majority of what we do in my firm is software and software related. And so the idea that software isn’t patentable or that concept, just doesn’t really make sense. All the work that we did for Twilio, we wrote 75 patent applications for them. It’s pure software. Duo Security, somewhere around 50 to 60 patents. It was all software. And Cruise, although they have the hardware, the robots that are driving around on the street, that was all software. And so, you know, the great, great, great portion of what we do as a patent firm is to work in software. And I don’t really distinguish inventions that are made in software and that are made in chemical compositions or that are made in other kinds of materials, or in electrical engineering or in computer engineering. To me, it’s all just like, are you solving a really hard problem that no one has solved before? The very first patent was a method of making soap. And so people often think of patents as they have to be tangible. That’s what our brains kind of like are attracted to, but the very, very first patent was a method of making soap. And so, you know, in the method of making soap is just like a method of programming a computer, then it’s like these, like four or five steps that have never been done before.

Kate 06:11
Interesting. I never would have guessed that most of your patents are software. So is that kind of your litmus test? Is it solving a really difficult problem? Like, how does a founder, I mean, should they always engage an attorney to see if their software is something that they can pursue a patent?

Jeff Schox 06:31
Yeah, I often kind of use, like, a couple different proxies or tests, and so it’s one of the proxies is just like, how many PhDs do you have on your team? And you know, like, how you know, how hard do you have to go out and, like, recruit for someone who has a very specific knowledge, because you have a very hard problem that you’re going after. So that’s one proxy. Another proxy might be like, hey, when you go back home for the holidays, Are you bragging to some of your, you know, college friends about this hard problem that you solved that no one thought was solvable, or is there something that you’re doing that a lot of people told you just couldn’t be done, and you figured out a way how to do it. And so those are sometimes, you know, ways, often kind of appealing to people’s egos, but that are trying to get at, like, are you doing something really hard, and did you solve it? But I also think that there’s sometimes, you know, whether that’s like a Twitter or something else that, like you would look and be like, Oh, what’s so hard about 140 characters, and it’s like, well, actually, to be able to simultaneously broadcast that to a billion people is not trivial. Right to be able to have all of that data, and kind of the architecture of how you hold all of that data was, like, wildly patentable at the time. There was a lot of innovation that was happening. And so a think of it in terms of, like, is your narrative around, hey, we’ve kind of solved this business innovation, or there’s this thing over here, there’s this business opportunity that we’re going to tackle, or is it, hey, there was a problem that was out there that people couldn’t solve in the past, and we figured out how to solve it. And if it’s the former, it’s probably not particularly patentable, but if it’s the latter, it should at least be, you know, explored.

Kate 08:17
Right? Okay, that’s a really good way of explaining it. Thank you. Okay, so that’s one myth.

Jeff Schox 08:24
Yeah, the second one is really, if I can’t enforce it, then it doesn’t have any value. And I think where that comes from is that most people understand that bringing a patent infringement lawsuit is really expensive. It’s really time consuming, and in fact, it’s often called the “Sport of Kings” to just kind of like elevate it to this thing where mere mortals don’t get involved in patent litigation. There’s a couple different problems with that particular statement. One, just because you can’t enforce it doesn’t mean that the acquirer of your company can’t enforce it. And so when we think a little bit about what we did for Cruise, we built a patent portfolio for them. And Cruise was, of course, acquired by General Motors. And at the time, General Motors had 10s of 1000s of patents, but it was like on windshield washers and, you know, on v6 engines and exhaust systems and seat materials and stuff like that. They didn’t have much on autonomy. And so when they kind of looked into their future, they saw Waymo, and they saw, at the time, Uber, and they were in Cruise, and they were thinking, we don’t have any patents in this particular space. And of course, Waymo is not making cars. They’re doing autonomy. And so if they were to get into some kind of patent squabble, GM would be infringing Waymo patents, but Waymo wouldn’t be infringing any GM patents, and that’s not a position where large companies like to be. They’d much prefer kind of a mutually assured destruction type of position where I have hundreds or 1000s of patents, many of which you infringe. And you have hundreds or 1000s of patents, many of which I infringe, but we’re not going to sue each other. And so GM felt exposed. And so somewhat of a big part of the Cruise acquisition was around that. And in fact, they put some kind of price tag around 120 million or so on the IP, which was a lot of money. This is according to an SEC filing. And so when we think a little bit about that Cruise itself was likely never going to enforce those patents. It’s a startup. It’s super distracting for a startup, but they were unbelievably valuable in the hands of General Motors. And so this concept of like, if I can’t enforce it, what value does it have? I think it’s just a weird way of looking at it. It’s very short sighted.

Kate 10:48
Very short sighted. And your example really shows that. And it makes sense for GM too. You know, it makes a lot of sense.

Jeff Schox 10:58
I sometimes think of it as like, you’re building this big, broad sword. I have a 13 year old son who’s into medieval swords, right? And it’s like, this big sword that you’re forging, and it’s way too heavy for, like, the small startup, like, they just can’t, you know, they can’t even pick it up, but give it to a giant, and the giant knows what to do with it.

Kate 11:18
Right. It makes a lot of sense. Okay, all right, thank you.

Jeff Schox 11:23
The third main myth is that, you know, people think of the cost of a patent portfolio to be the legal fees. And so, hey, this lawyer is charging 20 grand for a patent application, and this one’s charging 10, and this one’s charging 30. And they often think of it as like, Oh, well should I go to the cheaper one? Or, how do I evaluate this? Or what do I think about that? The reality is those costs are nothing compared to the true cost of the patent portfolio. And the true cost of a portfolio is failure at the patent office. And so let’s assume you spend 20, 30, $40k on a patent application from beginning to end, and let’s assume you spend a couple of hours of the CTOs time or the Head of Engineering’s time reviewing it and doing the invention capture. Those are real costs and those are painful for a startup. Dollars in time are really real and those are super painful. But if that patent application wasn’t written particularly well, the chances that it fails at the patent office are pretty good, and right now, it’s only about a 60 or 70% allowance rate, which means 30 or 40% of the patent applications get denied. And if your patent application wasn’t written well, that might drop to like 50% or maybe 40% chance of getting an allowance. If you don’t get a patent, it is just donated into the public domain. And so think about the cost, like, think about like, how badly you would not want all of your competitors to just go ahead and take one of your best ideas with a recipe on exactly how to do it, and to be able to just pick it up from the public domain, and to just go ahead and do it freely, because it’s published and it didn’t get across the finish line. And so when a startup paid a quarter million dollars, or half a million dollars, or million dollars to not have their competitors do that, or not allow them to do that. That might actually be the true cost of a patent is the failure piece. And so I think a lot of times the costs are painful and the time is painful, but this other kind of invisible thing that happens two years later when you fail is a thing that we try very, very hard to avoid.

Kate 13:39
It makes perfect sense. And we have founders on here all the time who talk about how they looked at costs and they were short sighted. They went with the less expensive option, or they didn’t do it because at the time, it just seemed like too much money. But then they share these stories of how it came back to bite them down the road. That happens a lot, but thank you for explaining those myths to us. You’ve worked with a lot of different startups and delved into all sorts of patents. If you could share some of that and walk us through some of your experience, I also think that would help the listeners see these myth themes too and in your work.

Jeff Schox 14:23
So, yeah, I’ve had that kind of a front row seat in about 700 or so startups over the last two decades. Twilio actually launched from our office. Jeff and Lawson had this pizza box that had like the run, the burndown list of all the things that needed to happen. You know, on that night that they launched, I purchased that pizza for them, you know, and it was like they ate it at my office and so, and it hangs in their office. And, it was an incredible ride. I was the first investor there, and it was like, that was a very, very special moment in my life. And we’ve had the good fortune of working with a lot of other, you know, incredible companies as well, be it we were an early investor and early representation on the Cruise side, and Joby and I mentioned Duo Security model on the digital health side. And so we ended up doing some work for Dropbox, they had acquired a couple of our clients. And same with Facebook. The little white dot in Instagram, of like, hey click here and you could go ahead and purchase this, kind of an advertising aspect of Instagram that was one of the patent applications that we wrote. And so, you know, we did some a little bit of work for Google along the way. And so had just incredible good fortune to work with such incredible companies. And I’ve seen a lot. Like how Coinbase came to us pretty late, you know, if you look at some of the filings, it was after their Series C that they came to us. And we played a lot of catch up in terms of, there was a lot of deep tech there. There’re tons of brilliant people in Coinbase, and there was a lot of kind of catch up work that we had to do. In patent law, if you have shipped something and exposed it and offered it to the public or offered it for sale, in the United States, you have a year in which to file, otherwise you can never pursue patents on that. And so there were some unfortunate things that were just like already too late. So a lot of startups when they come to us late, they realize that A, Series B, Series C, investors for the first time, you know, are asking about IP, and all of a sudden, it’s important. And can you build us a patent portfolio? And it’s super painful. It’s like, well, if you would have came to us a year or two ago, you know, in your Seed or your Series A round, we would have been able to capture all of the big ideas that you had. But now those are all in the past. And you know, after the one year statutory bar, we can’t go after them anymore. So what we have to go after next is just like the smaller features that are kind of built upon that core tech. And so We think deeply about like, How do you build a patent portfolio? How do you scale it? And I’ve thought a lot about this, and I think people generally have kind of the wrong impression that, like, oh, let’s build a patent portfolio. Let’s do, you know, 50 to 100 over the next couple of years. And I don’t think that makes any sense. And, oh, let’s wait to Series D or Series E, and like, we’ll file a couple. And that doesn’t make any sense either. Generally, I think if you are solving a really hard problem, you have a bunch of PhDs on your team. You’re probably looking at filing two or three or four a year and it’s hard to pick those because you probably have 20, 30, 40, ideas. And how do you pick a handful of them out of these like large funnel of ideas? We try to guide our clients in terms of what’s the highest value long term and what’s the highest patentability, so we don’t fail at the patent office. But generally, that’s like, how we build it over time. And it’s the hardware companies that generally come to us early and say, we’re a hardware company, we need a bunch of patents. Like hardware and patents go hand in hand. And ironically, we slow them down. Generally, those first couple versions are duct tape, you know? And they bought some things off the shelf. And, you know, it’s really only like v3 v4 where it’s like, yeah you’ve now kind of figured it out. Unless there’s some kind of like sensor or cool material or something like that that’s coming out of a national lab or university. Generally, we slow down hardware because it’s so hard to implement and so hard to test and to really figure out to get to the final thing of what you’re going to ship. Software is the exact opposite. And so generally, when people come to us, they’re like, Oh, they’re chill. And they’re going to, hey, let’s build this thing up, you know, maybe a year or two from now. And it’s like, look, most things in software are fairly easy to implement, especially compared to hardware or a computer chip. And so in software, we generally move a little bit faster. File one or two or three relatively quickly, and it kind of slows down from there. And so there’s these curves that we’ve kind of noticed over time, but I think they’re very different than the curves that most you know, the curve of how many patents you would get over time. And I think those curves are very different than what generally founders think or have assumptions around.

Kate 19:28
Absolutely. Logically you would think it’s the opposite, as you explained. Wow. So then most founders, when they come to you from a software company, they must be surprised.

Jeff Schox 19:40
Yes. And sometimes they’re like, well, we are lucky that we came to you now, because the one year date is like, next week, and can you help us, kind of thing. And so yeah, we generally have to move quickly on the software side. And, like, it’s generally one or two or three quickly, and then maybe there’s a little lull. And maybe they get into a rhythm of one or two or three a year after that. And hardware folks, they come to us with 20 ideas, and we’re like, yeah, none of these things are like, they’re just not what you’re gonna end up shipping. Like, look at all the duct tape. Like, this isn’t what you’re gonna do. Like, you haven’t figured it out. And so it’s, it’s, it’s painful to have those conversations, and I wish the general public kind or the startup ecosystem understood that a little bit better.

Kate 20:29
I bet, I bet. And is that one year – that’s very firm?

Jeff Schox 20:34
Yes. And so that is offer for sale or public disclosure. You have one year and that’s it. And there’s no way to extend it. We can file what’s called a provisional patent application, and generally, we file those across all of our clients, almost all of the time. And provisionals are great, they’re lighter weight, they’re cheaper, they don’t have claims, which are the things that are really difficult to write. And in many ways, it’s like a white paper of, Hey, I had this idea on this date. And as long as you get back to the patent office with a full patent application within a year, you get the benefit of that early date. It’s as if your patent application was filed on the date of the provisional. The provisional needs to be good, good enough to be able to say, I had this idea. And so, you know, there’s a wide range. You could file a PowerPoint presentation as a provisional, or you could file a fully drafted patent application as a provisional, and we generally think of it as like about a 15, 20 page document, as opposed to like a 40 or 50 page patent application. And so it’s a little bit easier. It doesn’t go quite as in depth, and you could build upon it throughout that year. And so when you finally go to file the full patent application one year later, you could add some of the implementation details that you’ve learned along the way. Hey, we figured out this worked and this didn’t work, and now we have a little bit more specificity to put into our patent application to kind of help distinguish it from everything else that’s ever been done before. And those things are great. We try to get to the patent office with an early date, with a provisional and with a decent amount of details and specifics to be able to help distinguish it from stuff that we haven’t found yet, or we haven’t, you know, seen yet, as some PhD at some obscure university or something. And so we need to be able to distinguish from all of those things, and having more details is sometimes helpful.

Kate 22:28
You had mentioned to me that that’s one of the tactics that founders could use, and I hadn’t heard of it. Are those typically successful like, what’s the rate on those provisionals?

Jeff Schox 22:39
Yeah, so the provisional itself isn’t examined, okay? Oh, it isn’t, yeah, it comes into play, like, if there’s something that you need that date,

Kate 22:47
Oh, so it’s about the date.

Jeff Schox 22:51
Yes. And so if there’s someone else who filed a patent application before your full application, but after your provisional, then the patent office will look at your provisional and say, Yep, you had this idea that you’re trying to file a full patent application on later. And so we’ll give you that date, and you get to basically jump back in time and pretend that your full patent application was filed at the date of the provisional. And so it’s really just this wonderful way of kind of sending a friend to wait in line for you.

Kate 23:19
Yeah, that’s such a great tactic.

Jeff Schox 23:21
And for startups, it’s perfect, because if you think about how much money you have raised in pre-seed, and then Seed, and then A and then B, you always want to delay big fees, especially legal fees, and so a provisional is perfect for that. And it also helps, because sometimes you’ll decide later on, you know what, we should have just held this as a trade secret. And you could do that the provisional just dies a quiet death. It doesn’t publish, it’s not publicly accessible. And you could turn this thing into a trade secret, or you could open source it, or you could file two patent applications off of it, or you can merge it with another provisional. And so it’s a ton of flexibility. It’s kind of like just a great big option, which is what startups need. They don’t always know exactly where they’re going, which is the beauty, and so the provisional kind of matches that perfectly.

Kate 24:15
That is a great tactic. Like you said, it gives the founder so many options, which they need. I mean, that’s another thing we hear on this show all the time, pivots. (Pivots all the time.) The other tactic you mentioned to me was an invention funnel, yeah.

Jeff Schox 24:32
And so just to kind of think of it as look, as a company, you probably have dozens, if not hundreds, of ideas every year. Then a bunch of those are just not patentable. A bunch of those like you could potentially patent, but it’s not super valuable to the company long term, it’s just not part of your core. Some of those might be great trade secrets. Some of those might make a great blog post. Some of those you know, you might want to kind of punt until later on to see if you continue to work on that. And so I think the rich and most valuable patent portfolios have this kind of fluid conversation around here are all of our ideas. And that if it really comes down to the CEO or CTO to kind of pick the invention, they sometimes pick the wrong one. And so we’re generally kind of used as a partner to be able to help prioritize. And generally, we kind of come up with a pace ahead of time. Hey, we’re going to file two this year. So let’s look at 20 inventions. Let’s look at 20 concepts and pick the best two. And so I think it’s generally nerve wracking to think about I’m going to go to my patent attorney with 20 ideas, because they’re likely going to sell you 20 patent applications. But there are great attorneys out there and great firms out there that have this model of like, I’ll help you be the patent strategist on your team, and kind of get them to think of this in terms of, help us prioritize. Help us think of the things that make sense. We have a budget for two or a budget for three. Help us pick those three. And having someone that knows your company really well, but also has a somewhat of an outside view, can often be incredibly helpful to pick the right ones.

Kate 26:23
Wow, that shows how your patent attorney is more like a partner in a set like a good one.

Jeff Schox 26:29
That’s kind of how we see it. You know, when I worked at a really large law firm and we had really large Fortune 50 type of companies, of course, every single thing they gave to us we filed a patent application on. But those companies had their own internal patent strategists. They had a committee. They thought about it carefully. They did a search, you know, they knew what their roadmap was. They knew what their budget was. And so there was someone on the inside that was doing all the strategy. And so when I broke off and I started my own firm, I thought I knew patent strategy. And, you know, I went, I remember my first couple of meetings, 20 plus years ago. And it’s like, All right, so like, what do you want me to patent? And the CTO was just like, I thought you were going to help me figure out what the patent. I don’t know what the patent.I got a PhD, and, like, they didn’t teach me anything about patent law. Like, aren’t you the expert? And it was like, Oh, yeah. Like, I’m I have to play that role, and I have to help figure out, why are we filing, and what are we filing, and where are we filing, and how often are we filing? And honestly, Kate, that took a while, like, we messed up lots of times, just like, over indexing or under indexing. It took a long time to figure out, like, Oh, this is patent strategy for startups, and it is often 180 degrees different than patent strategy for Fortune 500. And so that’s the role that we play. There’s a couple of other great firms out there that do the same thing, but that’s the role that we play, and we love doing that.

Kate 28:11
I was just going to say, I would guess that now that maybe is some of the most rewarding part of your work, because so much of the other work is just executing, then, right? Those large firms are just executing on these patents. But now, I mean, you must really enjoy being like a strategic partner with them around patents.

Jeff Schox 28:31
Not only that, so absolutely, 100% of what you just said, but AI is coming. And AI is coming for all of these jobs. I’ve seen this, you know, I’ve seen this on the horizon for a decade. (Excellent point.) It’s arrived. And so if you’re merely executing and you’re not doing any of the strategy, I’m not sure there’s a job there two years from now. And so we’re ready for it. This is what we’ve been planning for for a very long time. And this is kind of our job as AI is not going to figure out what to patent. (No.) AI is not going to be able to figure out what’s valuable to your company. And like, that’s the role that we play.

Kate 29:12
That’s awesome. I love it. Gosh, we’re coming up on time. We also said we’d touch on valuations around patents, if you wouldn’t mind just delving into that a little bit. I know we’re a little over time, but this has been fascinating.

Jeff Schox 29:27
Valuations are funny and a little tricky. I mean, there’s been times where some of our clients, the portfolios you know, was at the wind down of a company thought to be worth millions and it was worth 1000s. And there was other times where it was thought to be worth 1000s and it was worth millions. A lot of time it’s really like, how bad do you need these patents in your own portfolio to be able to prevent someone else from doing this. Kind of going back to the Cruise and GM example, they valued those patents very, very high, like an incredibly high value, like 10 million each or something. And it was because that’s what they needed in their portfolio. And if you have a ton of patents on a technology that doesn’t work well, then why would anyone want the patents? You’re like, you know, preventing someone from doing something that doesn’t work. I mean, that literally has zero value. And so patents, in and of itself, don’t have any value. It’s a, you know, I want to exclude someone from doing something unless that something is super valuable, and you can make money off of that, or margin off of that. And so, or you could defend yourself because you’re being attacked by someone, and you want to be able to top them with something. And so, the valuation of patents is particularly tricky. On one end, it’s, well, how many legal fees, dollars of legal fees Did you pay? Right? And on the other end, maybe it’s somewhere between a million or 10 million at the super high end, if all the stars align, you know, ideally you’re putting 40, 50k in, and you’re getting a million or two out on each of those.

Kate 31:04
Yeah, for a lot of people listening, that’s the goal. Okay. This was fascinating. Thank you so much for being here. We’ve never delved into patents this way. I found it so interesting for everybody listening that wants to find more information about Schox Patent Group. Where do they go?

Jeff Schox 31:27
Schox.com Is a great place to start. S, C, H, O, X dot com, and you could find a way to email me right from that website.

Kate 31:36
Great. I really appreciate your time today. I know you’re very busy. Thank you.

Jeff Schox 31:40
Thank you, Kate. It was my honor.

Intro 31:43
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