Whether seeking funding or looking to secure a high valuation for exit, a business’s position will always be strengthened if it can point to its assets. In this article, IP lawyer Suzy Schmitz gives us a step-by-step guide on how businesses can maximise their IP and boost their valuation.
Investing a little time into scoping and protecting intellectual property (IP) assets does not automatically mean registering a patent. In fact, there is much that can be done at minimal cost regarding IP, by implementing good business practices right from the start. The following steps demonstrate the necessary steps required to kick-start the process.
Step 1: Evaluate your IP and protect the crown jewels
Every business has IP assets. In some cases, such as a clothing brand, the IP rights in the trade mark and designs are fundamental to the business. In other cases, the IP assets may be less apparent and are frequently overlooked.
Regardless of the business model, an IP audit can be a useful way to identify and capitalise on the IP assets of the company. An IP audit seeks to address the following questions:
- What IP is used by our business?
- Do we own the IP we use, or do we have sufficient rights to use it?
- Have we sufficiently protected our key IP, such as trade marks or patentable inventions?
- How is our IP documented and stored?
- Can we exploit our IP in new ways, for example by licensing it to others?
- Where do the risks lie in relation to our IP (e.g. potential conflicts with third parties)?
Inevitably, actions will flow from an IP audit, such as pursuing new registrations for key trade marks. However, even if following an audit a company decides that no immediate action is required, the audit process will have assisted the business to understand its strengths and weaknesses regarding IP assets. In the event of a funding round or exit, this organised and documented approach will help to streamline a due diligence process and will be well regarded by future investors or purchasers.
Step 2: Manage your IP assets properly day to day
“Data theft” and “corporate espionage” may call to mind Hollywood spies like Jason Bourne, but in reality most IP theft is the result of oversight and poor day-to-day business practices. A better term might be IP leakage, albeit not so glamourous. Whether it be a relaxed approach to document storage and sharing, an insecure IT system or a reluctance to properly quiz people when leaving the company, often a significant volume of confidential information, trade secrets and other IP assets walk straight out the door along with departing employees. The situation is exacerbated as employees increase their use of ‘bring your own devices’.
A further factor relevant to IP leakage is the increasing use of cloud storage for business purposes. Whilst there is nothing wrong with this approach as such, cloud storage can prove problematic when it comes to IT forensics, as historic usage, download and access data is generally not available. Such data is invaluable when seeking to trace a suspected theft and to use as evidence to prove that an act of theft has been committed. In contrast, where downloads and access is restricted to a company’s home network, forensic information is generally more readily available and verifiable.
To manage the risk of IP leakage, as a starting point companies should assess what data is shared amongst its employees and how such material is stored, accessed and shared. Commercially sensitive information, such as customer lists and pricing data should be treated with great care and protected accordingly. Ideally, there should be a forensic trail relating to all use of such material and this should be preserved for a decent length of time.
We recommend companies ask the following questions, to manage the risk of IP leakage:
- How is data generated, stored and shared within the company?
- Of the above data, which categories need to be protected through extra measures?
- What access controls are in place, and how do we monitor these?
- If we suspect a data leak, what steps would we take?
- If we are using cloud-based storage and sharing facilities, have we checked these are appropriate for use in the case of commercially sensitive information?
- Would our systems support a forensic analysis?
By evaluating existing systems and putting in place appropriate controls, companies can help to ring-fence valuable confidential information and trade secrets, all of which comprise part of the IP assets of that company. In doing so they will protect not only the immediate business interests of the company but also the value of such IP assets themselves.
Step 3: Take care with your software contracts
Software is often a key business asset, particularly in the case of technology companies. Whether it be licensed in from third parties or bespoke software developed for the company, the contractual basis on which it is used should be agreed and carefully documented. Failure to do so could leave a company vulnerable to business interruption or accusation of IP infringement by third parties.
Nonetheless, companies often omit to manage their software assets appropriately. Here are some common mistakes made in relation to software licensing and development:
1. Unclear or risky licence terms relating to third-party software
If a company is licensing in software and is using that software to run a crucial part of their business, then the terms of the Licence Agreement governing their use are very important.
Badly drafted terms, terms that leave the business vulnerable, or having none at all, create uncertainty in key areas. This could relate to whether the company is licensed to use the software in the way it wants, for how long, and at what cost. Another common problem is operating under an outdated set of terms which no longer reflect the business arrangement in place.
An example could be an online travel booking site which uses white-label technology to facilitate and manage bookings.
- Let’s imagine a Licence Agreement was signed with the third-party licensor early in the business’ development; the document was done in a hurry and on a low budget and has sat in a drawer ever since.
- Two years on and the business is doing well. The white-label technology is essential to the operation of the business and has become entrenched as the company has developed processes and software add-ins around it.
- The licensor is acquired by a third party. The licensing arrangements do not suit the new business owner. They dust off the Licence Agreement and see it allows them to terminate without cause, which they immediately do.
- The online travel business suddenly needs to find alternative technology to license in – probably at a higher fee and requiring investment to transition and redesign add-ins. A major business interruption is highly likely.
A situation like the one mentioned above can be mitigated by:
- Ensuring that use of third-party software is documented in a properly drafted Licence Agreement.
- Paying close attention to key terms such as:
(a) exactly what software is being licensed;
(b) the purpose for which the business is allowed to use it;
(c) price, and price adjustments over time; and
(d) term and the grounds for termination (particularly any entitlement on the licensor to terminate without cause).
- Revisiting the licensing arrangements from time to time as the business develops, seeking to re-negotiate if appropriate.
- Being aware of any vulnerabilities in the arrangement (such as the licensor’s right to terminate), and having a back-up plan if the licensing arrangement comes to an end.
2. Failing to acquire ownership in bespoke software
One answer to the licensing risks associated with third-party software is to develop bespoke software for use by the business. In practice, most technology businesses will use a combination of licensed-in third-party software, bespoke software and open source software (the latter being software which can be modified and shared as it is publically available).
Bespoke software is frequently developed by a third-party company or individual contractor, rather than in-house by employees. This is generally because specialist software development skills are not held within the business and it is more economical to engage someone on a temporary basis rather than employing someone.
When someone is engaged in this way, whether it be a company or an individual, it is important to document the parties’ intentions regarding ownership of IP generated in the course of performance of the contracted services. Where the contract is silent, the default position shall generally be that the copyright in the software is owned by the consultant, not by the party who has hired them to develop the code. This can come as a shock when a company comes to evaluate its IP assets and realises it does not actually own the core technology underpinning its business. Needless to say, this has the potential to dramatically affect a business’ valuation and can send an investor heading straight for the door.
An example could be a social media website with a ‘unique’ look and feel.
- The website owner invested £20,000 engaging a web designer early in the website’s development, and assumed that the copyright and other IP rights in the materials, designs and software (the ‘Deliverables’) delivered by the consultant belonged to them. After all, these are what makes their site unique and what they paid for, right?
- The website seeks external investment to enable it to launch in a new territory. However, during the due diligence process the investor’s lawyer asks to see a copy of the IP assignment relating to the Deliverables (a very normal question to ask).
- But there is not one, as the rights were never assigned and therefore still belong to the consultant. The company has a licence to use those IP assets but not to exclude others from using them.
- The lawyer advises the investor that the company does not actually own these key aspects of its business and the investment does not go ahead.
As will be apparent from the points made above, a casual approach to software licensing can prove catastrophic for a business. While cash is always tight, particularly when a business is in its early stages, this is not an area on which a business should cut corners. By putting in place appropriate licences and/or IP assignments from the beginning, the business’ technology IP assets can be future-proofed. This will have an obvious flow-on effect when it comes to valuing the business.
A discussion regarding IP assets, particular in the case of technology companies, is not complete without mentioning patents. Patents are an important form of registerable IP. Achieving a registration, or just having the application pending, can significantly boost a company’s ability to ring-fence its offering.
Patents are national rights, which give the owner the exclusive right to perform an invention – the subject matter of the patent – or to license others to do so. The ambit of a protected invention will depend on how the patent documents have been drafted, in particular, the ‘specification’ document. These documents are highly technical and can appear impenetrable to a layman’s eyes (hence why specialist advice is essential when drafting or seeking to enforce a patent). If granted and well founded, a patent can provide a powerful weapon as it ring-fences an invention and provides a company with a point of difference from its competitors.
However, there is a tendency, particularly among tech start-ups, to assume that patent protection will either not be available or will be prohibitively expensive and hence not pursue it. This approach is unfortunate as by dismissing the option out of hand, such businesses may throw away an excellent opportunity to ring-fence their operations and hence boost their company’s valuation. While patents are not always achievable, particularly in the case of software, in some cases it is possible to obtain such patents in Europe and the US, subject to overcoming registration hurdles.
Dr Mark Bentall, a patent attorney specialising in software patents at Reddie & Grose, urges companies to think twice before dismissing the option. He says:
“Companies often dismiss their ideas or inventions as not being clever enough – resist the temptation. Rather, if you have a new idea or invention, discuss it first, in confidence, with your lawyer or patent attorney before disclosing it to third parties.”
Therefore, we recommend that companies at least stop to consider the option and make some preliminary enquiries (most of which can be done without incurring costs) to see if an application is worth pursuing.
We have the following practical tips for companies considering patent protection:
- The key question is to consider whether your technology does something different to what has been done before, and whether the difference is inventive (as opposed to an obvious improvement or adjustment). If it does, then you are off to a good start.
- In the case of technology, also consider whether your invention does more than merely taking a known business method and performing the method using a computer. If it does, then this is also a good sign.
- Even if you aren’t sure if your invention is sufficiently inventive, it may be worth speaking to a patent attorney to get a view of whether you should proceed. If you ask, you may be able to have this initial chat without charge.
- Confidentiality will always be key, so if you think you might want to seek patent protection, then keep your invention secret. This should include using Non-Disclosure Agreements with any third parties to which you disclose the invention.
- Budget-wise, the major cost in seeking patent protection is the cost of paying a patent attorney to draft the application. This cost can vary widely depending on how much work is involved in preparing the documents. There are also official filing fees to be paid, once you have decided which patent office you wish to apply to. As a ball-park guide, you would need to put aside around £5,000–10,000 for the initial application, and a further £10,000 for costs incurred up to registration.
- You can assist to keep costs down by preparing detailed technical documents in-house and providing these to your patent attorney. The better and clearer the information you provide, the more straightforward their job will be and this will usually be reflected in lower fees.
IP assets are important for all companies, even if the core focus of the business is not IP-related. For that reason, all companies can benefit from taking the time to evaluate, protect and properly manage their IP assets. An IP Audit can be a useful starting point to assist this process. In addition to acting on any specific outcomes of the audit (for example, trade mark registrations), companies can also boost their position by implementing appropriate day-to-day practices relating to IP management. We also recommend that companies look carefully at the software they use within their business and ensure that the contracts governing use and ownership are suitable and future-proofed. Finally, patent registration should be considered; if a patentable invention is owned by the company, then achieving a patent registration can be a ticket to success.
By taking the steps outlined above, companies can bring their IP assets into focus and manage them appropriately. A company that does so will put itself in an advantageous position and will reap the reward should it decide to seek funding or look to secure a high valuation for exit.
 A common misconception is that open source software is not subject to any restrictions regarding use. In fact, open source software is made ‘freely’ available subject to compliance with a strict set of licensing terms. For example, some open source licences require that anyone who uses the open source material in their computer program must in turn make their own computer program freely available to others.
 Patents are vulnerable to challenge; for example, opponents may seek to argue that they haven’t been validly registered, as the invention in question was already disclosed to the public at the time of the application or was obvious having regard to what else was available at the time. Patents which cannot withstand such an attack are inherently weak.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.