Legal Challenges of Hard Tech

While every startup faces its own unique legal challenges, the market of the startup often determines what form those challenges end up taking. There is no area where that is more true than in the "hard tech" space. Hard tech startups are multifaceted and complex, facing barriers in both the business and legal world that other startups will never encounter.

How founders navigate these legal and business hurdles is often make-or-break for the company. The legal challenges often include various combinations of intellectual property issues, regulatory requirements, capital intensity, long timelines and technical risks, and increased litigation risks.

While many of these issues might be faced by an average startup, hard tech startups deal with them in ways unique to the space.

Intellectual Property

Hard tech startups tend to operate in industries where intellectual property rights are not only important but often absolutely critical. Existing patents held by others can be significant barriers to entry. Similarly obtaining the necessary patents a hard tech startup might need is a cost-intensive and complex legal process. This is on top of the usual startup IP needs that include protecting trade secrets, obtaining trademarks, etc.

Navigating through the patent process can be difficult at best. Deciding if you should file or if it's possible to license or obtain an already existing patent requires sound advice from advisors and legal counsel. This is not only a challenge of expertise but of time, challenges which strain most Hard Tech startups.

Regulatory Requirements/Regulatory Complexity, Talent, and Structure

Even if a hard tech startup navigates the IP, timeline, and funding issues, they still have a significant hurdle to overcome that other startups in the software space don't regularly face: regulation. Complying with regulatory structures can stop a hard tech startup in its tracks. Industries such as aerospace, pharmaceuticals, and energy face significant government oversight.

Navigating the regulations often requires legal expertise and even more time as government agencies work through applications. The best way to mitigate this issue is to understand that this hurdle is coming early and to build out a team to tackle the regulatory issues. Facing regulation early and swiftly can mitigate some of the risks of failing to secure government approval on a first attempt and the general costs of compliance.

High Capital Costs and Economies of Scale/Capital Intensity and Funding Gaps

Building the necessary tech, R&D cycles, patent applications, navigating regulations, and handling litigation risk is all costly. Hard tech startups often need millions just to discover if the technology they are developing is viable. This creates long and fragile runways for hard tech startups. In this space it's common for a startup to run out of funding before launch due to cumulative costs, falling into a valley of death between R&D and commercialization due to the fact that research money can often dry up long before private capital views the hard tech as a viable investment.

In practice this might be countered by numerous priced rounds, and other methods of raising money in early stages. If not handled carefully, this can result in significant dilution of the founders, too many investors with too many rights that hamper the startup, or excessive legal spend on papering the fundraising itself. Savvy hard tech founders invest early in building out their funding runway with an eye towards the long-term with legal counsel to support them and ensure that the rounds of fundraising keep the business in good health.

Long Timelines and Technical Risks

R&D cycles, patent applications, and other experimental matters that are inherent to hard tech create long and uncertain paths for hard tech startups. Unlike other industries, hard tech often has to prove scientific feasibility in the real-world. This combines both technical risk (can we even do this scientifically?), and market risk (will anyone pay for this?). Even when the tech is proven, marketability is not guaranteed.

Physical iterations of tech are slower and more expensive than something like a software release. This creates slower learning cycles, as slowly manifesting failures clash with the typical speed and timelines of ventures. Navigating this often requires specific legal structuring of fundraising and investor rights to offset these issues, in order to secure the necessary funding.

Litigation Risks

All startups face some litigation risk, as operating a business at any level will open up the business to some risk; however, hard tech often faces a few unique litigation risks. First, IP infringement risks are increased, especially in the area of patent infringement. IP is core to hard tech: patent holders must protect their IP more stringently than other situations. Second, compliance risks exist due to the higher levels of government oversight, and failure to comply may result in litigation. Third, a hard tech product impacts people more directly, and tech failure may cause physical or property harm in the real world and open the company up to further litigation.

Founder Takeaway/Legal Support

So what's a founder to do? With all these additional hurdles and risks inherent to the hard tech space, is a founder supposed to simply give up on their tech? Absolutely not. Hard tech is one of the most dynamic and valuable areas of startup, with real world impact on the cutting edge of change. Managing these hurdles simply requires long-term planning with the right team to manage these risks. At Founders Law, we support hard tech startups from ideation to product launch, navigating IP, regulation, fundraising, and litigation risk so you can focus on innovation.