You are living every entrepreneur's dream...After
years of 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. Unfortunately, that sleep could become an intellectual
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 to 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.
finalize the acquisition deal, you'll have to endure due diligence, of course,
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 IP (intellectual property) portfolio.
is at this point that your dream becomes a nightmare.
one night, the buyer's CEO calls to break it to you. The lawyers have concluded
that, because you did not execute something called work-for-hire agreements
with your outside contractors, your company does not own their work product. They
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.
hell you say," you say. "I paid good money for that work product, and
I paid to file the patents!"
buyer's CEO says she's sorry but she trusts her lawyers, who
say your patents are worthless because you do not really own them. She says she
considered offering to hold back a 10 or 20 percent discount from the total
sales price ($10-$20 million) to be kept in escrow as a war chest 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. But in the end, she figured that this whole independent contractor
thing is probably just the tip of an iceberg of headaches, so it's just best
for her to pass. No deal.
the nightmare is not independent contractors. Sometimes it's a forgotten
founder, a person who was in the room helping to work out the initial inventive
leaps that led to the company's core innovations, but then left the company
without signing the proper documents. Sometimes it's an NDA (nondisclosure
agreement) that terminates too early, or a patent application that was filed
too late. Sometimes it's a missing trademark search. The nightmares are legion.
attention to sound IP practices and controls can, especially in the purposefully
ungenerous view of someone else's lawyers, gut your IP portfolio, completely
deflate your company's valuation and leave you with nothing.
panic. Your entrepreneurial dream does not have to become a nightmare. There's
still time to fix these problems. How? The way to begin is with an IP audit.
goal of an IP audit is to verify the answers to these questions:
- 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
- 3. Is your IP strong
and enforceable? If you sue someone for infringing it, will you win?
complete IP audit identifies Âthe 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, yes, contracts) for ensuring that
the answers will henceforth always be "yes."