You are living every entrepreneur’s dream. After years of sleepless nights sweating for equity, you are preparing to cash out. Your startup company has become an acquisition target. After several rounds of negotiations, a strategic partner offers to buy your company for a whopping $100 million. You’ll finally get a good night’s sleep.
You are understandably proud of yourself, and with good reason. As CEO, you’ve run a tight ship. You’ve used outside contractors instead of full time employees whenever possible. And you’ve managed to keep costs at a bare minimum. When your lawyers offered to draft you up a bunch of agreements to govern those outside contractor relationships, for example, you told them to hit the road – you would do just fine with a handshake deal, thank you very much. None of that pay-by-the-pound legal mumbo jumbo for you.
To finalize the acquisition deal, you’ll have to endure something called “due diligence,” which is when the buyer’s lawyers get to look closely at your company – closely enough to satisfy themselves that their client is not buying a headache. One of the many things they will want to review is your intellectual property (IP) portfolio.
It is at this point where your dream threatens to become a nightmare.
Late one night, the buyer’s CEO calls to break the bad news to you. Her lawyers have concluded that, because you did not execute something called assignment agreements and work-for-hire agreements with your outside contractors, your company does not own the work product they created. The contractors do. If you don’t own the underlying work product, you don’t own the IP in that work product. And it was the prospect of market exclusivity afforded by your IP that moved the buyer to set a $100 million purchase price on your company in the first place.
You cannot sell what you do not own. No IP, no sale.
“The heck you say,” you say. “I paid good money for that work product, and I paid to file the patents and register the copyrights!”
The buyer says she’s sorry but she trusts her lawyers, who say your patents and copyrights are not so hot because you do not really own them. She says she does not wish to fund the defense of the lawsuits that will inevitably arise when your independent contractors realize how rich you have gotten by selling what rightfully belongs to them. Furthermore, she figures that this whole independent contractor thing is probably just the tip of a messy iceberg – in short, a big fat headache — so it’s just best for her to pass. No deal. Have a nice day.
Sometimes the nightmare is not independent contractors. Sometimes it’s a forgotten founder, a person who was once a part of the team making the initial inventive leaps that led to the company’s core innovations, but then left the company in its youth without signing the proper documents. Sometimes it’s a nondisclosure agreement that terminates too early, or a patent application that is filed too late. Sometimes it’s a neglected trademark search. Sometimes is just plain bad paperwork. The nightmares are legion.
Insufficient attention to sound IP practices and controls can, especially in the purposefully ungenerous view of someone else’s lawyers, gut your IP portfolio, deflate your company’s valuation, and leave you with nothing.
Don’t panic. Your entrepreneurial dream does not have to become a nightmare. There’s still time to fix these problems. How? The best way to begin is with an IP audit.
The goal of an IP audit is to verify that the answer to these questions is “yes”:
1. Do you own your IP? In the parlance of lawyers, do you have clean title to your IP assets and do you own them free of liens and encumbrances?
2. Is your IP portfolio complete? Are you protecting everything that is capable of being protected?
3. Is your IP strong and enforceable? If you sue someone for infringing it, will you win?
A complete IP audit identifies the IP assets in your company for which the answer to any of the above questions is “no,” and recommends remedial steps for changing the “no” to a “yes,” as well as the appropriate processes and procedures (and contracts) for ensuring that the answers will henceforth always be “yes.”
Correcting IP title defects requires getting the proper ownership agreements signed between the company and the people who created the IP assets, especially if those creators were not full time employees at the time they did the work. Mind you, this is always legally more powerful before the assets are created (which is what the new processes and procedures are meant to enforce in the future), but an after-the-fact agreement still works. But make no mistake, you’ll be going back to a former worker on bended knee asking for a new agreement to be signed months or years after the work was originally done. This can be awkward at best and expensive at worst, as the worker is more than likely to detect the sweet smell of money in the air and attempt to part you from some of it in exchange for the signature you request.
Correcting completeness defects is simply a matter of filing for whatever patents, copyrights, and trademarks are missing in the portfolio, and instituting internal procedures for identifying and assessing new innovations on a constant basis so that new IP doesn’t slip through the corporate cracks in the future.
Finally, correcting strength & enforceability defects requires a measure of strategic attention to ensure the company’s innovations are being protected in the strongest possible ways in light of the competitive landscape in which they exist. For some innovations, a slew of patents will be the answer; other innovations will best be kept confidential in reliance on trade secret law; for yet others, a mix of patents and trade secrets, as well as copyrights and trademarks, will provide the most bang for your buck.
IP law is esoteric, arcane, and often counterintuitive. Normal business assumptions about ownership do not always apply, and can prove to be quite risky. Aggressive, thoughtful, expert management of your IP portfolio is a sound, rational business practice.
The expense of an IP audit is always directly proportional to the number of documents requiring review. If the IP portfolio is large, so too will the legal bill undoubtedly be. Nonetheless, maintaining a strong IP portfolio is an essential strategy in today’s knowledge economy. Thus, an IP audit is almost always worth the money, if only so you can sleep at night.