Weekly, we receive phone calls from prospective clients inquiring about provisional patent applications. While provisional patent applications have a number of benefits, especially for cost-conscious startups and entrepreneurs, we too often encounter misconceptions concerning the protections that a provisional patent application provides. In this blog post we will cover what a provision patent application is, its positives and negatives.

What is a provisional patent?

A provisional patent application is essentially a placeholder patent application filed with the US Patent and Trademark Office. Once filed, you have up to 1 year to convert the provisional patent application into a full utility patent application and, if not converted, the provisional automatically expires. Once the utility patent application is filed, the subject matter of the utility patent application (ie. invention) will be granted a claim date effective as of the date the provisional patent application was filed.

There are a few formal provisional drafting requirements, including a title, the name(s) of the inventor(s), address of the inventor(s), correspondence address, and a written description. At times, a drawing on the back of a napkin can be sufficient. The provisional application is not publicly available, and the USPTO does not conduct any review of it.

It is critical to understand that no patent rights are granted by the provisional patent application, except for the ability to file for a full utility patent application within the 1-year time frame for the invention described in the provisional patent application.

Positives

There are a number of benefits to a provisional patent application, namely:

1. Preserves your intellectual property rights as of the provisional’s filing date, which is critical in advance of any public disclosures you are contemplating;
2. Relatively inexpensive, with the cost of a provisional application being substantially less than a full utility patent application;
3. Is not made publicly available;
4. You are “Patent Pending”; and
5. May appeal to investors by beginning an intellectual property portfolio.

Negatives

The downsides to a provisional patent application are:

1. Does not issue as a patent;
2. Is not a utility patent and, unless converted into one, lapses after one year;
3. Since it is not reviewed by the USPTO, no stance is taken on whether the invention is patentable; and
4. Only exists under US law with no similar structure existing in Canada or Europe.

We believe that provisional patent applications are an immensely valuable resource for our clients, especially where deployed as a cost-effective means to secure a filing date for a subsequent utility patent in advance of contemplated public disclosures of the invention. However, when considering a provisional patent application, it’s critical to keep in mind that it’s a stepping stone to a full utility patent, and not a stand-alone patent application itself.

Feel free to reach out to the Voyer Law team to discuss provisional patent applications and a filing strategy for your invention.

We frequently work with Canadian startups operating a U.S. (usually Delaware) company incorporated on their behalf by Stripe Atlas.  On the surface, Stripe’s assistance with incorporating this U.S. company seems convenient and an easy way to meet the U.S. entity requirements to use the Stripe payment processing platform.  However, a number of material issues are generated by Stripe when it incorporates a U.S. company on behalf of a Canadian startup.

Problem #1

It’s critical to understand that a U.S. company cannot operate out of Canada without registering as doing business in Canada (thus exposing the company to unnecessarily complicated Canadian/US dual taxation), which Stripe does not address in its standard documentation.

The common solution to this is to treat the U.S. company as a parent to (or as a subsidiary of) a new Canadian company and isolate each company’s tax obligations in their respective countries.

Problem #2

Your U.S. company formed by Stripe needs to transact with your Canadian company on an arm’s length basis, taking into account tax transfer pricing rules.  If you don’t engage in tax planning around the flow of cash and assets between the two companies, expect expensive tax problems in the future

These tax issues can typically be addressed through cross-border tax planning as documented in an Intercompany Agreement in which we address the flow of cash and assets between the two companies.  For example, in the agreement we can address which company books sales in which countries and how the cash from these sales moves between the companies.

While Stripe Atlas touts the ease and speed with which a U.S. company can be incorporated, it neglects the massive cross-border legal and accounting issues that forming a U.S. company abroad generates.  If these issues are understood before incorporating, Stripe Atlas can be a valuable tool but, if not understood and planned for, expect it to generate more problems than it solves for.

Many founders I speak with are concerned about where their startup is incorporated and how this could impact fundraising opportunities in the United States.  In reality, this concern is unfounded.

Any sophisticated investor considers the product/service, team, market potential and other commercialization factors before, if at all, considering where a startup is incorporated.  In some circumstances, an investor may request that the startup alter its jurisdiction of incorporation but whether or not they proceed with the investment is determined 90% by quality of the company over jurisdiction of incorporation.  As relayed to me by Canadian founders, “if an investor passes because you’re a Canadian company, that’s not the real reason for passing“.

Where an investor requires your startup to be incorporated in the U.S. there is a simple process for creating this structure that I discussed in a previous blog post – The Canadian-U.S. Swap: Moving an Early-Stage Startup to the U.S.

Canadian founders should focus on building a compelling product/service and not waste energy worrying about minutia of incorporation.  Sell investors on your company and any issues concerning where your company is incorporated can be worked out between your legal counsel and investors.

It seems Canadians are still wrestling with whether to incorporate their startup in Delaware.  I wrote about this question back in September 2014  and since then the post has racked up over 1,000 views.  Back then, I concluded with this piece of advice, which I still stand by:

Don’t lock yourself into Delaware before you know where your investment comes from.  Based upon the cost and complexity of operating a Delaware startup from Canada, I recommend that you incorporate in Canada at the start.  Where a future U.S. investor requires you to incorporate in Delaware (or another state) your legal advisors can assist with this transition.  Conversely, Canadian investors may prefer to invest in a Canadian company!

Tip:  your product/service is important, not the place of incorporation.

In addition to the legal, accounting and immigration reasons I raised in support of initially incorporating in Canada, I wanted to revisit this question and point out the various incentive programs only available to Canadian companies:

1.  BC EBC Tax Credit.  This tax credit grants investors in eligible business corporations (EBC) a 30% refundable tax credit for their investment (up to $60,000 annually).  This program is only available to BC or federally incorporated companies.  BC angel investors quite like this program and it can often serve as an incentive for investment – an incentive that is lost should you incorporate in Delaware.

2.  Industrial Research Assistance Program.  Otherwise known as IRAP, the program provides companies with non-refundable funding under 4 different arms, including grants that can cover substantial portions of your company’s labour or R&D costs.  This program is only available to provincial or federally incorporated companies.  Again, if you incorporate in Delaware you lose access to IRAP funding.

The above are two examples among many programs, both federal and provincial, that require recipients to be Canadian companies.  When choosing where to incorporate, consider the benefits that are available to Canadian companies that are lost if you incorporate a Delaware company.  While I’m not averse to incorporating in Delaware, I am averse to incorporating in Delaware for the sake of emulating other successful U.S. startups without considering the costs/benefits of this decision.

As I concluded two years ago:  incorporate in Canada first.  If your jurisdiction of incorporation needs to change this can be easily accommodated in the future.