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24 Aug Why Owning a Patent Means You Should Sell Your Company

Owning a valuable patent can be a very costly proposition, particularly for a small business. The legal requirements associated with getting a patent granted are burdensome enough. In some instances, it may take up to three years for the process to play out. Immediately following that time, startups likely experience a period of tranquility before the inevitable hits:

Someone infringes or challenges on the patent. When (not if) this happens, the costs, battles, and time commitment needed to proceed are far steeper than most startups can handle. Some estimates out there have the cost of just starting the process of defending your patent at upwards of $1 million. That number could balloon to as much as $10 million in legal fees before all is said and done.

Very few startups have $10 million in the bank that they’re willing and able to dedicate toward a patent case.

And there’s no guarantee the patent holder will even win their case. A 2012 Patent Litigation Study from PwC states that patent holders lose their case nearly 40% of the time.

The startups that do win their case typically did so because of the quality (and correlated high costs) of their lawyers.

In patent cases, juries are more likely than judges to favor patent holders

According to the same PwC study, patent holders are more likely to win their case if a jury sees it. This explains why jury trials in patent cases have grown exponentially since the 1980s (from 14% to more than 55%). If you’re going to go into battle, you might as well seek every advantage you can.

But why is it beneficial to have your case heard by a jury? When you think about it, the typical juror won’t have the background in legalese to understand the nuances of a patent case.

How, then, are they coming to their decisions?

More than likely, these jurors are swayed by the rhetoric of talented and well-spoken attorneys, who typically come at a high cost.

Few startups have the capital required to retain this caliber of attorney, particularly for as long a period of time as an average patent case might require.

And while these startups struggle, on one side of the table, to keep up with the costs,

their competitors on the other side of the table are dipping into deep pockets dedicated toward these types of cases.

It is the epitome of the epic battle between David and Goliath–as readily evidenced in the software industry mergers and acquisitions

As a result, the legal process involved in defending a patent is more than capable of completely dismantling the foundation of a young business. And to make matters worse, getting caught in a pending patent case is enough to drive a number of potential investors away from your company.

Few investors want to associate with startups involved in a patent court battle

As if the pending legal costs associated with a patent case weren’t enough, startups also have to worry about how these legal issues will impact their fundraising. It’s a terrible case of Catch-22:

One of the only ways a startup can successfully fight a patent case is to raise the capital necessary to fund the legal fees. But few investors are willing to invest in a company whose proceeds will be used to fight the case. With so many cases lost in court, it’s not a wise financial decision for investors to hitch their wagon to a company caught up in the circus.

As a result, a logical perspective would be to accept that patent ownership is best left for big companies who have the financial means to defend that patent when the time comes.

That’s why, as a startup business owner, the best strategy you could pursue would be to begin to start the exit process at the same time that you file a patent application.

Start the exit process early to avoid disastrous outcomes

When you apply for a patent, the information you disclose remains confidential, and out of the eyes of your competitors. During this period, you’re well positioned to show your patent to potential acquirers, under a non-disclosure agreement (NDA).

These buyers have a firm grasp on how patents work and can make educated assumptions on not only whether a patent will be granted, but also what type of value it’ll hold in the future. If the patent is worth its weight, an investor won’t shy away from acquiring it, even before it’s been granted. They understand what’s at stake, including waiting, potentially, a decade or more to assess how the investment panned out.

This gives young entrepreneurs a way to financially benefit from their patent, without having to endure the inevitable costs associated with defending it. Is this

the ideal outcome? Perhaps not. Many patent holders remain committed to seeing their ideas evolve into eventual products that hold value; however, from a business standpoint, the wisest strategy to pursue is to begin the exit process the moment you file for a patent.

 

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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.
  • Doug Limbach

    This article’s conclusion is flat out wrong:

    “As a result, a logical perspective would be to accept that patent ownership is best left for big companies who have the financial means to defend that patent when the time comes.

    That’s why, as a startup business owner, the best strategy you could pursue would be to begin to start the exit process at the same time that you file a patent application.”

    A patent owner has no obligation to “defend” (a better term is “assert”) their own patent. It’s true that if a company sues a competitor for patent infringement and sees the case all the way through trial, the legal fees will undoubtedly be at least several million dollars. But a startup can likely find attorneys who will take their case on a contingency fee basis. And the notion that you can’t even start the process (file a complaint in federal court) for less than a million dollars is incorrect – you can file suit for a fraction of that amount and are not obligated to pursue the case through trial. If a startup that has just received a patent does not want to spend its resources (not just money but considerable time) asserting the patent, the company can continue competing in the marketplace against the competitor as if the patent did not exist, and consider suing at a later date.

    If a startup is getting sued by a competitor for allegedly infringing the competitor’s patent, that is a different issue that has nothing to do with the startup obtaining a patent of its own.

    As a patent attorney who has been obtaining patents for startups for 25 years, I find this article’s notion that a startup needs to be acquired the moment they obtain a patent absolutely absurd. Patents are needed by most all ongoing startups that require significant R&D capital or other early investment. Investors understand that the startup’s business model may not support litigation to assert its patents early on. But that does not mean that obtaining patents is not necessary or that a company cannot keep going once it has one. Before investing, investors typically need to see that there is at least a chance of keeping competitors from riding on the company’s coattails. If and when it does come time for a startup to be acquired, the company’s valuation will most often be much higher if it has obtained patent protection on its technology.