Business of IP – Understanding and Creating Value

In Insights

23 March, 2022

In this article, Anders Isaksson explores some of the key factors and motivators for why companies small or large should obtain intellectual property. The aim is to help you understand when and how you can create value from IP, especially when considering the long and short-term goals of a company.

Venture Capital

Whether you are a tech unicorn, a start-up or an established manufacturing firm – nothing is more attractive to potential investors than intellectual property. There are multiple reasons for this.

First, it adds a layer of protection for their investment – your inventions, brand, technology are protected and tied to the company. Second, you have taken the time to think about the value in your company, which signals to investors you are serious, have considered the short and long-term goals of your company and overall implies a level of trustworthiness. Third, intellectual property has no limit on its value – the value of intellectual property can increase indefinitely which means the investor’s investment has a great chance of increasing.

Intellectual property rights also signal to investors how serious you are about your company’s business plan. For example, if one of the reasons you are seeking investment is to expand your global footprint to say China but you haven’t yet considered any intellectual property rights in China. Then the investor compiles a due diligence report on your intellectual property rights (which are only registered in EU countries) this is going to raise a massive red flag.

By doing due diligence on your competitors (potentially through freedom to operate analysis or other intellectual property landscaping tools) you will get even more attractive to investors. This shows to an investor you are not infringing on anyone else’s IP and at the same time you have a good idea of what your competitors are up to in similar and adjacent industries, but that you also have a potential roadmap for future business opportunities.

Another exercise when seeking investment is to consider any overlooked opportunities in terms of the value of your intellectual property. This depends on to what extent you have worked with IP counsel – so this may have already happened, but if you are looking to raise venture capital – it might be worth having an expert take a second look to see if there is any additional value to be unlocked from your intellectual property.

Investors do not gamble – and intellectual property is a key decision factor when investing in companies of all sizes and industries. For the above reasons, do not underestimate the indefinite value of intellectual property and its power in securing crucial investments for your company.

Keeping Secrets a Secret

For any company, it is essential to keep information, products and know-how originating from different business activities within the company. One way of achieving this and at the same time formalising these activities is through intellectual property. Designs, trademarks, patents and trade secrets can tie your company’s know-how to the business, ensuring that the information, products and know-how stays within and continues to add value.   

 

Trade secrets are a special type of intellectual property best suited for information or know-how that can be restricted to a select group of people. A trade secret is information or know-how that is commercially valuable, known only to a limited group of persons and can be subject to reasonable steps to keep the information or know-how secret.

 

For example, a situation where trade secrets could be a valuable protection mechanism is when an algorithm runs locally at a company’s site or in the cloud but is not accessible to anyone except a select group. In such a situation where there are computations are done remotely from any user and the output that goes back to the user, if any, is not easily reverse engineered, there could be great value in protecting such an algorithm as a trade secret. This could preferably also be combined with one or more patents.

 

The protection should preferably be formalised to the select group so that clearly understand that they are dealing with a trade secret and that they need to keep it secret. It could be a good idea to make them aware of this by using an additional agreement such as a non-disclosure agreement or other relevant agreements. 

 

Intellectual property is one of the best sources to ensure knowledge is tied to your company. Depending on the knowledge – a combination of intellectual property rights may be used. It is worth taking the time to work with an intellectual property expert early-on to assess the best ways of keeping secrets a secret at your company. 

Collaborations and Mergers

At any stage in the corporate cycle, it is likely that merger or collaboration opportunities will arise. In both instances, intellectual property nicely puts into place what is known before engaging in such activities and can help to provide concrete outcomes from the merger or collaboration.

Collaborations

In terms of collaborations with the purpose of mainly developing new products or services – intellectual property rights clearly define what intellectual assets, normally know how, both parties have prior to entering into a collaboration. If anything – this is the easiest part. From here though, you need to work with the other party to clearly understand how the intellectual property from both sides can work together and how the generated intellectual property will be protected.

First of all, roles need to be defined and this means creating a document listing each collaborator’s role and trying to anticipate what they will create. This document should preferably be included into a contract. The main purpose is to present a clear structure and definition of who is doing what from each side and what any possible desired outcome is of the collaboration.

Up next is ownerships, you need to ensure that before entering a collaboration it is decided how each creation will be protected, who will own the intellectual property and what each creator will receive in return. For instance, different business purposes of the result can be divided between the collaborators, making both sides happier with any result of the collaboration. Also, they may be more incentivised to complete the collaboration.

Lastly, it is important to try to detail as much as possible at the beginning of this process. If as much as possible can be detailed, discussed and agreed upon beforehand it means there will be less room for surprises later down the line. For example, timetables, how delays will be handled, plan for filing intellectual property and if extra budget is needed will it be split equally.

Mergers

The best advice for smaller companies or start-ups when it comes to mergers is to have intellectual property. In my experience, larger companies will not even talk to you if you do not have any intellectual property rights. The intellectual property right does not be a registered right, but it needs to be formalised. Formalised here means documented in writing or otherwise documented and stored as well as dated.

You also need to ensure you have all the necessary documentation and an overview of these intellectual property rights so the acquirer can start a detailed review and confirm everything is in order.

This should always include who owns the intellectual property. While in theory, this should be the company, in some cases it is not uncommon for individuals who were involved in the creation of such IP to be listed and they may no longer be with the company.

The buyer is always going to do thorough due diligence of any acquiring company with a particular focus on intellectual property so there is no chance of hiding anything or hoping it will not be picked up.

Ensuring everything is in order from the start or disclosed with explanations to the acquirer will make for a much smoother merger.

Spin-Offs

Spin-offs, the internal division of the business unit or product or whatever the split is going to be and how having dedicated intellectual property (designs, patents or trademarks) for the spin-off will make it easier to perform several functions later down the line like valuations and certain commercial matters.

There are several forms of spin-offs, but an encompassing definition includes: when a company creates a new independent company by selling or distributing new shares of its existing business.

The first step in a spin-off is to do thorough due diligence and identify any benefits and drawbacks for creating the spin-off. Some benefits could be for handling risks within a part of a company or more commonly better market potential for a part of the company. The due diligence will then identify at least both the potential market and all existing intellectual property.

These two components are the most important ones to consider when dividing the intellectual property and deciding on which IP will stay with the parent company and which IP will be transferred to the spin-off. The due diligence will also then highlight where there is a possibility to strengthen the IP, both for the parent company as well as for the spin-off.

Another benefit with already having intellectual property from the beginning in the spin-off is the ability to place a value on all the intellectual property rights and this should be reflected in the transfer documents. Thus, from the start the spin-off will have assets in the company which can be used if needed for other purposes like funding. It also helps the parent to put a price on what is being transferred for various commercial reasons and the spin-off understands what assets it is receiving.

In some cases, intellectual property may be shared by the parent company and the spin-off. In such cases, it is important to have licencing agreements in place and thoroughly consider which entity, the parent company or the spin-off that should own the intellectual property. Any transfer of rights will trigger an update to the register before IP offices around the world to capture the new owner (the spin-off).

While everything should have been captured during the above steps it is also important to have legal agreements in place for any claims, potential claims, mediation or arbitration as an alternative to litigation (depending on the relationship between the two parties) and so on.

Where the spin-off will have a new corporate identity from the parent company, involve intellectual property counsel early to make sure that the IP is handled in a good way for both parties during the creation of a spin-off. But also, afterward so that a suitable new brand, patents or other intellectual property are adopted together with the spin-off’s corporate structure to support the new business.

Negotiations

Going into any negotiation you should be transparent and fully comprehend what you are bringing to the negotiation table. This requires a detailed understanding of what you own and conducting internal due diligence on your rights and filings.

In order to prepare yourself for the negotiation, you could consider any of the following steps to maximise your intellectual property rights. Consider working with experienced counsel to see if there is anything you can do before the negotiations begin to enhance the IP rights you own. Some key questions to ask:

  • Is there or do you need to update your nondisclosure agreements?
  • Have you protected or has your brand logo evolved over the years and is it still covered by any initial registrations?
  • Do you have business processes that could be protected as know-how or trade secrets and should not be discussed in the negotiations?
  • Are all your trade secrets agreements in order and are key people aware of the trade secrets?
  • Are there inventions that could benefit from patent protection, and should they be protected before the negotiations?

You should not only be transparent on what you own and have registered in the shape of IPRs but also the methods you used to derive at what you own and what is included in the portfolio. Essentially you need to be organised – with the results and your process. This shows a high degree of professionalism and will give you a sense of completeness when you make it to the negation table.

Take time to research the other party – find out what they are interested in, what other negotiations they might have been involved in recently. Utilise this knowledge to your advantage in how you tackle maximising your IP rights, but also how you present what you own.

Lastly, do not be afraid to get specific. When you are clear on what you own and its value – you can bargain for parameters that will benefit you. Things to consider are exclusivity, nonexclusively, territory and scope.

Costs of IP

What are the costs of IP? Let’s look at what IP rights (patents, trademarks and designs) can cost and when it makes business sense to protect that IP.

Patents

Patents are one of the driving forces behind your business, not only in terms of protection but also as a commercial asset. A patent protects inventive ideas or processes and is the first line of defence against competitors. As with all business decisions, the benefits and costs need to be weighed against your current or future revenue and needs.

Official costs vary depending on the jurisdictions where you file an application and out of all the IP rights – patents are the most expensive. In addition to application fees, you also must pay maintenance fees over the lifetime of the patent, for as long as you want the patent to be in force.

For example, if you filed a patent application for your core invention in your home market like Sweden it would normally cost 5500 SEK in official fees. If you then would keep the patent in force for 11 years, this would add up to be 20 100 SEK in official annuity fees for Sweden. The total official fees would then be 25 600 SEK, and this cost together with the preparatory cost of drafting the application needs to be weighed against current or possible revenue from the protected product.

Trademarks

Trademarks can protect words, phrases, symbols, sounds and colour schemes. While protection does vary by jurisdiction (in some locations smells can be protected) – trademarks are intellectual assets that can protect your brand, which is often the face and reputation of an organisation.

Compared to patents, trademarks are generally less expensive to obtain. For example, if you were to register for one mark in one class in Sweden – you would be looking at 2000 SEK in official fees. Trademarks also incur maintenance fees – but these are relatively inexpensive compared to patents.

Designs

Designs protect the visual appearance of a product. This includes packaging, patterns, computer icons and product shapes. Registration provides recognition, value and protection of your investment and hard work.

Designs are becoming increasingly valuable, especially as a tool against infringers and copycats. Like trademarks – designs have relatively low-cost registration procedures. For example, to register a design in Sweden it would cost 2000 SEK. Designs also incur maintenance fees, but like trademarks they are relatively inexpensive compared to patents.

Focus

For businesses early in their life cycle, intellectual property can be considered an expensive but necessary asset. This should however rarely be a reason for not getting any intellectual property and even less so if the financial value is much greater than the immediate costs.

It is therefore worthwhile working with your local counsel to focus your intellectual property efforts. This means among others considering which jurisdictions and which intellectual property rights (patents, trademarks and designs) are business-critical (must be registered and maintained) in the short and long term.

From here a registration strategy can be put in place that aligns with the business’s future aims and goals. For example, if expansion into a certain jurisdiction is planned in two-or-three years’ time – a marker can be placed into the strategy to consider the necessary protection in the run-up to launching in that jurisdiction.

If you have any questions on how IP can help your business or what combination of intellectual property rights would be most suitable – please reach out: anders.isaksson@awa.com.

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