Because I am an intellectual property attorney, I see value in intangibles. If your start-up makes and sells wheelbarrows or shoes or widgets, the balance sheet entries associated with those tangible assets are relatively straightforward. So when you have your exit and sell your company to Black & Decker or Nike or National Widget, part of the fat check you get at closing from the buyer will account for those tangible assets. Easy peasy.
But I find that many start-ups leave money on the table at their exit by not fully accounting for and proactively contemplating their intangible assets. For example, assume that you are going to sell your tech start-up for $10 million to Google. During due diligence on your company conducted by Google’s very expensive Silicon Valley lawyers, here are some of the questions they will ask you: (1) do you own all your intellectual property? Prove it; (2) give us a list of all your domain names and social media identifiers. Are they all in the name of the company we are buying?; (3) give us a list of all your foreign and domestic patents, patent applications, registered trademarks and registered copyrights; (4) give us copies of all your signed Non-Disclosure Agreements and show us how you use NDAs to protect your trade secrets. And so on.
If you do not or cannot answer these questions, or if you answer them incorrectly from the buyer’s perspective, the value of the deal will go down because your buyer will have to attend to all the things you left unaddressed, and that costs money. For example, if you have not protected your trade secrets with either NDAs or patent applications, why would the buyer pay top dollar for your “secret” sauce recipe? If you have not registered your trademarks in the U.S. and abroad, why would a buyer pay a premium for your brand? In each case, your buyer has to go spend money now to try to close the barn door after the horse has escaped, to use a bucolic metaphor, and that’s money the buyer will not be paying you.
Even if you are not planning on an exit, at some point you may need to seek loans, venture capital or angel financing, and in each of these scenarios, the same due diligence questions will be asked. An angel will not give you money if you cannot prove you own all of your claimed IP.
It thus makes sense to plan, build and protect your IP portfolio at the very beginning of your start-up’s life. Yes, I know that a start-up has many mouths to feed, from the servers to the bandwidth to the cost to hire the coders, but you will get a tremendous return on investment from your IP if it has been accounted for and protected—certainly a far larger ROI than you will get on your tangible assets, particularly if you are a tech start-up.
Here are some suggestions on how to plan now to monetize your IP later via an exit or angel round:
1. Before any IP is created (ideas, code, domains, inventions, logos, social media identifiers, videos, web sites), make sure that your company gets the necessary paperwork in place to ensure it owns the rights in the IP.
2. Be careful not to accidently vest the IP in yourself and not your newly formed LLC or corporation. Ownership of IP you create, author or invent does not automatically vest in your company in all cases, even if you are a member of the LLC or the CEO of the corporation.
3. Be aware of relevant deadlines that affect your ability to protect the company’s IP. Google will reduce or retract its offer to buy you if it turns out that you have “blown” the deadlines to file U.S. or foreign patents on a key technology.
4. Get good competent counsel as you plan your IP strategy. The Internet is a dangerous place when it comes to self-help advice on complicated IP topics.
Remember that in today’s economy, most start-ups do not sell wheelbarrows or shoes or widgets. They sell software or apps or business methods or consulting services or SaaS, all of which derive their value proposition from intellectual property constructs, not from a warehouse full of tangible assets. Preparing now by being a wise steward of your IP will garner you a much more robust payday when you exit.
For more information, please contact our Business Group or call 208.344.6000.