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Patent

23 Mar Intellectual Property: Patents, Trademarks & Contracts for Public Offerings

When it comes time to take your company public, the SEC doesn’t care if your company isn’t profitable. They don’t care whether or not there is a great deal of cash in the bank. They don’t care if you’re a startup either. What they care about most is that you’re real. The job of the SEC is not to screen bad investments, but bad actors and schemers who’re trying to pull the wool over the eyes of an unsuspecting public. There are a couple of ways to give the SEC some confidence that what you’re doing is not some new pump-and-dump opportunity. The best way to ensure your outfit is legit is to have some proof of revenue. It doesn’t necessarily need to be a great deal, but the business really isn’t a business unless it has begun taking in money. Second, the company could own some asset(s) that holds the promise of future revenue. Such an asset could include anything from oil rights to patents and trademarks and everything in between. In the late 1990’s and early 2000’s such assets were domains names and the companies that went public with them. Here we’ll discuss some of the positives and negatives of using assets as a means for taking a company public and what you can do to ensure your public offering using your assets or intellectual property is done in-line and above board.

Benefits of Intellectual Property & Contracts

The biggest benefit to solidly protected intellectual property is the ability to maintain market leadership in a particular market niche without being beholden to other potential competitors or entrants. It’s an unnatural barrier to entry that any startup would absolutely kill for. When it comes to going public it also paints a viable story for a business that may need or desire public status to raise some capital, but doesn’t have much in terms of traction or revenue. The SEC likes such a business because it’s a better story for protecting investors. The investors like it because it’s a better story for protecting investors.

One great benefit of having multiple patents inside a public company is the ability to create spin-off entities of a particular patent portfolio. If a business is created, taken public and holds a large number of applicable and viable patents, then said patents can be used to create public company spin-offs where each company simply is a mirror image, in terms of shareholders, of its public parent. Even if one individual spin-off is successful in its own right, the returns to the shareholders can sometimes be greater as separate entities. Keep in mind, this typically only works when you have separate teams with the right expertise to make it work. As always, a success of any kind is all about the people.

Similar to IP is the ability to use a secured long-term contract with a reputable company, companies or government entity to do a public offering. Such an opportunity not only gives investors much more confidence, but ensures your public offering is much more solid, especially if you’re using it to raise some capital.

Downside Risks

Because we’re talking about startups, there are a couple of types of risks at play here. First, there is the technology risk. Just because you have a patent on something doesn’t necessarily mean that you’ll be able to get that patent into production. Or perhaps the company has a patent for something like fission, but getting it to work may be nigh to impossible. In addition, there is also implementation risk. Even if the engineering and development team is able to deliver on all the promises that the patent represents, it doesn’t guarantee success. The company also must include success in operations, fulfillment and support. An advanced marketing, sales, finance and accounting team are also required to ensure the business can take a promising technology and maximize its potential.

Some of these risks can be mitigated by owning a portfolio of patents, trademarks and contracts, but the assets are only as good as the revenue they produce. One such company with a trove of patents is Seattle-based IntellectualVentures. While IntellectualVentures is a private company–and considered very secretive–the company hasn’t had as much success as it probably would have liked in it’s spin-out efforts. If you own enough patents and have a good legal team, you can even replicate the IntVen model of patent trolling, but you’ll likely get a lot of bad press and certainly many more counter lawsuits as a result. This is one of the reasons Mark Cuban of Broadcast.com and SharkTank fame has kept himself one step removed from his patent trolling company Vringo. This is the type of strategy that works for those that enjoy a good legal battle, don’t mind the bad press and have the cash to pay for it.

While going public is not for everyone and can be especially detrimental to the startup with little to no revenue or profits, it can certainly be a viable option to the right intellectual property holder with the right process and plan in place to take the company to the next level. If you’re interested in taking your intellectual property public, please get in touch, we would love to help.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
  • Jacint Soler

    Very interesting piece.We also have the experience of using IP as contribution to JV to penetrate emerging markets, a very useful tool for cash-strapped Spanish companies. Jacinto. http://www.emergiapartners.com

    • Nate Nead

      Thank you for sharing Jacint. With the right structure, IP can be harnessed into something more fluid which can be a special aid for startups.

  • Anarbold Odonkhuu

    Such a good article on IP. A week ago I was involved in a bankers meetings and mentioned about the IP for the collateral basis and in mongolia, patents and other similar issue is not allowed to be granted for loans or for start up. Private funds are not very much legally developed but still in a process of engagement. Thanks Nate for sharing this.

    • Nate Nead

      Hi Anarbold. Thank you for visiting. Financing often follows good patent protection and both financing and patent protection only work when there is good legal precedent. With this statement, I’m not disparaging on Mongolia at all, as Mongolia is still developing. As it does, and as the large amounts of wealth in that country are tapped, I’m certain IP and funding will go hand-in-hand with the expansion. Good things are bound to happen there. I think the Mongolian people and outside investors are having a hard time being patient 🙂

      Thanks again for visiting.

      • Anarbold Odonkhuu

        Hi, Nate. I fully understand what you put in the article. It is worth of being translated into Mongolian Language. Can we translate it to post it in our community blogs? Because we need to make it known in correct perspective. Because I don’t see any good articles in short way.

        • Nate Nead

          Certainly, if you don’t mind providing attribution by linking back to the original post here. Thanks!

          • Anarbold Odonkhuu

            Thank you. We will do it with all links and names for sure.

  • I concur with the comments and the ability to leverage into a public offering but by the same token there is an inherently higher risk involved. Nothing ultimately replaces the solid fundamentals of established revenue, excellent cost management and proven profitability and of course a strong management team. IP’s may be legally sound and filed but that doesn’t prevent another company filing a patent (especially in the medical field) for something very similar that positively differentiates itself and has a higher probability for achieving market success/acceptance, hence the concept of risk. Additionally IP’s have a time-clock working against them as any delays, referenced above, runs the risk that something better and more innovative has just hit the ground running. As they say in Option parlance, you are out of the money!!

    • Nate Nead

      Couldn’t agree more. It would seem the more risk-averse and lucrative model for a public company owning patents is to own multiple and leverage them against larger firms as a troll, as I mentioned above. It makes it easier to run a shell company with no operations and a strong legal team (as opposed to real management and operations).

      There are good recent examples of successful IP-based companies that are in start-up mode and now trading on the OTC: GTRQ (http://www.geotraq.com/) being one of those.

  • Jim hill

    Many companies who have intellectual property trade secrets (what we would call “know how”) do not want to put a patent forth because they fear that many patents can be “reverse engineered” and so they protect their trade secrets with confidentiality agreements among the few employees who know how the trade secrets work. We often are involved in buying companies for PE firms and nonsponsored companies where the target has a great deal of trade secret know how yet it has not protected it with confidentiality agreements. Also, the recent Alice decision has cast a pall over a number of patents that include business processes but also other patents. Jim

    • Nate Nead

      Thank you for your very solid points Jim. The ability to “reverse engineer” or perform a patent work-around is more prevalent than ever before. Exposing patents to the scrutiny and publicity of a public company could potential pose a great risk, particularly to process-based patents where work-arounds are even more easily accomplished. Internal trade secrets and specialized know-how, while not legally protectable through IP, can certainly be still held close to the chest when a company goes public. Such tacit knowledge is not something that is necessarily required in typical SEC reporting.

      In any event, going public with just a patent in hand, is most certainly not a cure-all and could expose a company to even more unnecessary risk.

      Thanks again for sharing.

      • Jim hill

        My pleasure and look forward to others’ comments. Jim