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My startup is working on a consumer product (manufacture, sell, ship), where we have developed a really great improvement over our competitors. We have patent pending status, and will be entering the market shortly.

Because some of our competitors are very large corporations we're of course concerned that they may try to squash us by infirnging the patent or challenging it to create unbearable legal costs for us.

I'm interested to learn what others' experiences were if they had to defend their patents early on in their start-ups' existence and how they dealt with the main risk (running out of cash).

I have heard of patent lawyers that would litigate for a portion of the settlement, or patent insurance and the like, but I don't know much about how realistic these options are, and how well they might work.

---Update----

Got one very thorough answer, but I'd like to open up the discussion and ask what it is that start ups do right to ensure they can get some value from their inventions & IP (e.g. secure licensing deals / etc).

What can a (non-software) entrepreneur do to strengthen his hand as much as possible.

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I am sorry to have to break it to you, but you can't really hope to defend your patent against an 800 ton guerrilla (or a giant company).

There are a few Cinderella stories about people or companies that managed to get something out of a settlement, and people think that these occur on a regular bases, but they are extremely rare.

I heard about one inventor that got his patent stolen by a major corporation we all know (I won't share the name, since I don't want to be sued). He ended up wining $3M in court because he proved that they stole 5 out of the 8 claims he said they stole. The courts decision did not include legal expenses. Sounds like a happy ending to years and years of legal troubles, right? The corporation sued him for their legal expenses in defending the 3 remaining claims, and ended up wining $4M from his heirs, since he died over the years.

If you can scare a competitor away with a patent, more power to you, but don't expect it to work against the big boys.

What does work is their reputation. If you can threaten their reputation by taking them to court in a lawsuit, they might want to settle out of court. If for instance your patent was invented in a credible university, then you can be sure that it will not be stolen, since it doesn't look good when a corporation is precised as stealing from a university. That can be worth more then the university ends up taking for taking part in the invention.

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+1 on all this. Gee I don't have to write many answers anymore. :-) – Jason Nov 12 '09 at 22:26
+1 - You left nothing else to be said. :) – James Black Nov 13 '09 at 1:35
Thanks for the great answer, I definitely see what you're getting at with regard to losing in an all-out legal fight with a bigger 800lb gorrilla. Reputation risk is a great point, and somewhere were the smaller player definitely can score points. I'm going to try and open up the discussion here however, and ask what it is that start ups do right to ensure they can get some value from their inventions & IP (e.g. secure licensing deals / etc). What can a (non-software) entrepreneur do to strengthen his hand as much as possible. – Michael Nov 13 '09 at 19:23
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There's not much to add to RonGa's answer. But perhaps you should look at a strategy where you develop the product and the market with the intention of selling it to the big boys. Usually they would rather avoid legal battles and just buy out the competition.

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I strongly feel that if you go into the trouble of building a start-up, it should always be with the intention of "selling it to the big boys" as @Jeff points out. Or go public. – newyuppie Jan 7 '10 at 13:58
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As some say "I beg to differ". If you'll glance at my company website, you will see that my company, which represents individual inventors and patent owners, has taken on Microsoft, GE, Siemens, ABB, Rockwell Automation, Shuffle Master Inc, and others all of whom paid substantial royalties, or bought the patent at issue outright. Now we've been in business for fifteen years, and before starting my company I was a partner in a law firm specializing in patent litigation and then a corporate vice president of litigation of a Fortune 200 high-tech company, so we knew the ropes. The main reason we've been doing as well as we have is that we scrupulously complete a thorough evaluation of the patent, and the infringer, before taking on an enforcement/licensing effort. But we're proof that you don't have to roll over and give up-

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Thanks for the reply. Looking at the landscape facing an inventor, finding an attorney or firm who will litigate on my behalf is a great help. However, I would like to know more about the relative benefits and drawbacks of going this route - working with a firm after infringement took place to figure out what recourse is available VS. taking preventive measures such as getting insurance that ensures you will have resources to prosecute if infringement occurs. – Michael Mar 15 '10 at 2:29

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