Dear Reader
I have asked David Copping and John Hull of Farrer & Co to write this month’s article on Intellectual Property as a Value Proposition, and I am very grateful to them for an excellent summary of the six key steps they recommend for early stage businesses and SMEs. I am sure you will agree that Intellectual Property Rights (IPRs) are the least understood asset class for most businesses, and what is fascinating is that packaging them can provide the security for external finance – something that is not readily available in today’s post banking crisis world.
This was perhaps the most interesting topic emanating from the seminar my new venture, the International Business Structuring Association (IBSA) held at the Barbican on 4th March. We had over 130 attendees to learn about the issues surrounding the development of a small domestic company (Polycon Lens Company) into a multi-national global corporation called the Eyemax Group! And the creation of the IPR holding company and the accumulation of varied IPRs spread over several subsidiaries into one entity and used as security for an external loan was the most talked about issue in the drinks that followed the event.
The seminar heralded the launch of the London Branch of the IBSA and was a very successful evening. IBSA Branches are overseen by a Committee of practitioners committed to promoting best practice within the industry. With me in the London Branch are Pete Miller (Vice-Chairman), Anne Fairpo, Nigel Eastaway, Tiran Kiranoglu, Jim Asher, John Mather, Tom Wesel, Mike Luckett and of course my IFS colleague Dmitry Zapol.
IP is one of the topics that will be discussed at a series of events to be held throughout the year, and for those able to attend events in London, I encourage you to please ‘Save the Date’ for the following Discussion Groups that promise to be very informative and engaging:
Thursday 15th May 2014 at 17:30
Transparency of International Business Structures – issues centring on the OECD BEPS initiative
Tuesday 16th September 2014 at 17:30
Intellectual Property as a Value Proposition
Tuesday 2nd December 2014 at 17:30
International Business Structures and Fiduciary Relationships
Another date of note for those able to attend our London events is June 3rd when the IBSA will be hosting a conference on Business Structuring and the Digital Economy at the Mandarin Oriental Hyde Park hotel. It will deal with the principal issue being considered by the OECD in their BEPS initiative, which is how to tax international digital businesses in the absence of a permanent establishment using traditional concepts of what constitutes a p.e.
The IBSA is also launching Branches in many other countries, starting with Singapore where we are holding a seminar at the Singapore Cricket Clubthis coming Monday at 6pm – also using the Polycon Lens case study and also followed by drinks!
The idea of the IBSA is to enjoy the company of other professional advisors from a variety of disciplines ranging from lawyers, accountants, bankers, corporate service providers, private equity fund managers, non-executive directors, and of course IP specialists. Not to forget CFOs and CEOs, as we believe the organisation will be vital for entrepreneurial clients themselves wanting to understand issues vital to their business requirements, and meet professionals from the multi-disciplines of IBSA members in an informative and social atmosphere. And with over 100 registered attendees for the Singapore seminar, I believe the Singapore Branch will get off to a flying start.
And talking about flying, I am off to Singapore today with my wife Sonia on what happens to be our wedding anniversary! Many of you will know the long suffering Sonia who will be travelling with me when I open the Hong Kong Branch on 10th April, to New York at the end of May, and to Cyprus, Tel Aviv and Geneva in June. More about this and the actual dates in subsequent newsletters.
My ambition for the IBSA is to professionalise the practice of international business structuring, which is why we have a procedure for accepting new members as you can see from the membership application form to be downloaded at (click here). I would like to promote international business structuring as a transparent and effective necessity which does not have the public perception of aggressive tax planning, as well as to create a community where professionals at all levels can learn from each other and have access to worldwide knowledge and contacts. Members of one branch will be able to attend seminars, discussion groups, social events etc in other countries within the same annual fee of £500, and will have concessions at the various international conferences we hold each year. The Community is starting to capture the imagination of both advisers and their clients – the scope of the IBSA is massive and I do hope you will enjoy being part of it.
With my best regards
Roy Saunders
Dealing with IP as an asset – 6 key steps for early stage businesses and SMEs
When colleague John Hull and I sat down with Roy and Dmitry over a drink last week conversation centred around how the smartest, most innovative, high-growth businesses we know are leveraging their intellectual property (IP) rights, either to secure debt or equity finance (where fundraising or an exit is contemplated) or simply maximise revenues.
Dealing with intellectual property (IP) in a transactional context is a hot topic. Kelvin King’s and Martin Brassell’s excellent report for the UK Intellectual Property Office highlighted current market failures which prevent UK and European businesses effectively “Banking on IP”[1]. These failures relate in part to the relative complexity of IP as an asset class, and the diversity of individual intangible rights which exist under the general “IP rights” banner (more on this below). The modern business world is built (and to a degree thrives) on complexity but, based on our experience, a large proportion of growing businesses and SMEs are still failing to tackle this complexity and properly package their IP. This has a direct negative effect on their bottom line, in terms of exit valuations, licensing revenue, or borrowing prospects.
On the other side of the negotiating table, most investors and lenders are far less comfortable in dealing with IP than they are with more tangible assets, such as bricks and mortar or recognisable income streams.
We feel that both the entrepreneurial and investor/lender communities still have much to learn when it comes to dealing with IP as an asset. Following 6 simple steps can, we think, help to give your business a competitive edge.
1. Get informed – understanding IP Rights
Every entrepreneur or technologist (or investor/lender operating in such spheres) should have a basic understanding of the different kinds of IP right, and the core features of each. Even a very rudimentary understanding along the lines of the following can help:
| IP Right | Registration required? | Protects (in broad terms) | Provides a Monopoly? | Value independent of first owner? |
|---|---|---|---|---|
| Copyright | No, arises automatically | Artistic and literary works, incl. software | No – prevents copying | Yes |
| Patents | Yes | Inventions with potential for industrial application | Yes, in registered territory | Yes |
| Trade Marks | Not necessarily, but registration useful – helps enforcement | Trading names, logos | Yes, (where regd) in regd goods/ services and territory | Potentially |
| Design Rights | Both registered and unregistered right | Aesthetic appearance of products | Registered – yes Unregistered – no | Yes |
| Confidential information/trade secrets | No | Secret information or data | No – prevents unauthorised use or disclosure | Only if lawfully obtained and confidentiality preserved |
| Database right | No | Investment in obtaining and presenting data (in the form of a database) | No – prevents unauthorised extraction and reutilisation | Potentially, depending on nature of data and consents |
Without a basic understanding of IP rights there is a risk that IP will remain un-captured, that rights to protect will be lost, or exploitation opportunities missed. Good, basic information is freely available, for example on the UK Intellectual Property Office’s website. Free workshops are available from public institutions such as the British Library’s Business & IP Centre.You should also speak to your legal adviser to see what free training they offer in relation to IP rights and ask to be included on relevant mailing/invite lists (or contact us at Farrer & Co – we’d be happy to help).
2. Make sure that you own it
One of the most common failures we see in fast growing technology or IP-based businesses is a failure to clearly secure ownership of core IP, particularly where it has (as is often the case) been developed by individuals who, one way or another, are not employees.
A (very) basic rule of thumb is that IP generated by employees in the course of their employment is owned by the employer, but that IP generated by third party contractors or collaborators (which could include freelancers, software developers, academics assisting with proof of concept testing, or friends mucking-in) will remain with those third parties. Where third parties are involved during the early stages of a business venture, suitable IP assignments should be entered into (normally in the contract covering the relevant work).
When attempting to sell your business, secure your first major strategic licensing deal or raise finance, problems around ownership are likely to be spotted during routine due diligence. Issues around ownership can impact on valuation, lead to a retention of sale proceeds or on-going indemnification or, in extremis, be deal breakers. Plus, as your business grows, it will become much more expensive to fix any gaps in your chain of title to the relevant IP, particularly if the third party IP owner is unscrupulous or disgruntled; hence the need to secure ownership at an early stage.
3. Register what you can (within reason)
According to the “Banking on IP” report
“based on balance sheet analysis, over 9% of [UK] small businesses have patents and trade marks, rising to 14.5% of medium sized companies and just under 17% of large companies” [2]
As mentioned above, certain kinds of IP can be registered, potentially providing monopoly protection in the relevant field (eg in the case of patents or registered trade marks). Registrations provide a competitive advantage and allow a certain degree of market freedom within the scope of the protected rights. An ancillary benefit is that investors and lenders will often make assumptions based on the strength of a company’s registered IP portfolio (see step 6 below), particularly where (as the statistic above indicates) businesses owning registered IP are in the minority.
But a balance must be struck. For every business, the cost of filings for registration needs to be weighed against the commercial benefits: international filings may need to be staggered to fit with cash flow modelling and necessity (always with an eye on priority dates). Registering everything you possibly can (particularly in relation to trade marks and endless domain name variants) is unlikely to be a wise use of funds.
4. Check your freedom to operate
Many early-stage businesses’ and SMEs’ primary focus is on their internal IP position (ownership and registration). They forget to look to the market and world at large to assess whether or not their business infringes the rights of others. This is particularly a risk in the case of the monopoly style rights (patents, trade marks) which can be infringed entirely innocently and inadvertently (given that there is no requirement for copying).
Freedom to operate (FTO) issues are a hot topic currently, particularly in relation to software patents, patent trolls generally and (in the life science sphere) the previous grant of patents for naturally occurring phenomena such as gene sequences. Patent searching is a complex undertaking and requires specialist assistance which comes at a price, but for most science-based businesses, or information technology businesses looking to enter the US market, it is a necessity which must feature in any overall business plan or strategy. Increasingly the cost and complexity of these searches (and the existence of earlier, vaguely defined patents) is seen as a drag on growth and innovation and certain steps are being taken by legislators to address such concerns[3]. But for now it remains a big and difficult issue.
For trade marks, the searching is rather more straightforward, with most national and international registers being accessible and easily searchable and the existence of prior unregistered rights normally being fairly easy to test via the wonders of a Google search.
Even if a business runs no FTO searches and simply “hopes for the best”, adopting an ostrich-esque, head-in-sand style approach will not pay off in the long run as any well advised investor or lender will run their own searches before deciding whether or not to invest in the business.
5. Avoid inadvertent loss or leakage
Many businesses we assess, when performing legal due diligence, have done the initial hard work in terms of capturing and registering IP, but then do something which potentially loses or devalues the IP (normally in the rush to grow the business as fast as possible). This could be by:
1. disclosing a potential patentable invention in a public setting (jeopardising the scope for patent protection);
2. signing an NDA or services/development agreement with a big industrial partner which includes assignments or licences of IP (or a vague right for the partner to take the benefit of any derivative works);
3. (in the case of software development) using open source code licensed on restrictive/reciprocal licence terms (such as the Free Software Foundation’s “General Public Licence” or GPL);
4. granting exclusive licences without adequate performance obligations on the licensee’s part, or clear rights to terminate where minimum sales/royalty targets are not met;
5. agreeing to restrictive covenants which do not attach to IPas such, but which effectively limit the IP owner’s ability to exploit;
6. not checking what research grants say around IP ownership; or
7. (increasingly) building a business on a third party platform (Facebook, say) and not checking the platform policies around ownership of data or IP.
Such problems can normally be avoided by soliciting a quick legal review – asking for a review of business-critical/showstopper risks only. Or, as a minimum, by at least reading any contractual paperwork carefully!
Publishing and policing an internal IP policy will also help to reduce IP loss or leakage and is likely to represent the gold standard, in terms of IP management within an organisation.
6. Record and tell the story
IP rights represent a complex asset class. Anything you can do, therefore, to:
(a) keep a full and clear register of all IP which you own and which you feel is material to your business; and
(b) explain why that IP is valuable (and potentially has a value independent from your/the owning business’s involvement)
will set you apart from the large majority of rival investment targets.
This step is incredibly easy compared to the other steps mentioned above, but rarely executed.
To stress why this is important on a purely practical level: acquirers or investors commission detailed legal due diligence on targets but in practice their focus will be drawn to the executive summary of the DD report, or even their lawyer’s verbal summary. A statement to the effect that a target’s IP position is robust and well organised can (rightly or wrongly) lead to extrapolations regarding the business as a whole – and the opposite is also true, where the target’s IP position is weak and disjointed.
Any IP report/register you produce can also potentially – if financially proportionate – be enhanced by an IP valuation specialist, who may be able to enhance your IP “story” with an attractive, market-tested valuation.
Summary
The 6 simple steps mentioned above are all fairly obvious and intuitive. Nevertheless, in practice they are rarely followed and we see a huge amount of value lost and angst created as a result. Hopefully you will find these pointers useful, in terms of adding value and avoiding future angst, when dealing with your prize intellectual property assets.
Best of luck
David Copping, Partner
Farrer & Co LLP ©
1. “Banking on IP – the role of intellectual property and intangible assets in facilitating business finance” Brassell, King (2013) (click here)
2. Ibid
3. eg the proposed Innovation Act (H.R. 3309; 113th Congress) in the US
Roy Saunders, Chairman, IFS and IBSA. IBSA is the network for international business advisors and their clients, bringing together specialist advisors to enable businesses to optimise the structure of their international operation by enhancing resilience in tax planning, mitigating regulatory and market risk and enabling sustainable multi-jurisdiction growth.
Roy Saunders created International Fiscal Services in 1971 which is a niche international tax boutique at 44 Southampton Buildings, London, WC2A 1AP. Website: (click here) Email: (click here)