Introduction:
“Patents” (as a collection of claims) are a common part of the acquisition process for many software companies. When you buy a famous company, you’ll often be given one or two patents, which will be valuable for a variety of reasons. In fact, if you’re interested in non-software companies and you want to know how to buy them from their founders, this is probably the best place to start.
Even better than owning one patent is owning many patents. The best example of this is Apple, which has an unlimited number of patents on different aspects of its business model (from the idea behind the iPhone itself to its entire universe of products). By owning these so-called “intellectual property rights”, they can use those patents as leverage in negotiations with other companies and offer them better terms than others might on similar technology.
Property rights make for great leverage… but what else makes for great leverage?
There are many different kinds of property rights in the world today – from copyright and trademark law to intellectual property such as patents and trade secrets but they all have something in common: they belong to whoever has the right to use them. So it follows that if you are trying to buy something (a company, a domain name, or whatever), you need to figure out what your rights are – and so should everyone else involved in acquiring it.
The key questions here are:
- What kind(s) do I need? Do I need a copyright? Trade secret? Business license? License fee? Trademark? The domain name (or addresses)? What product(s)? What services? And what combination(s) do I need inside the combination(s)?
- Who gets my money when I sell my assets? Would it be someone else who already owns them? Can I hold back some money until later or do I need it all at once when we sign off on the deal? Or maybe even before we agree on everything…? Can we come up with some kind; or should we just go ahead and pay and hope everything works out well enough that there aren’t any legal hangovers afterward?)
- If there is going to be any money paid out after we sign off on a transaction, who gets what share(es)? Is it shared equally among all parties involved (like “all owners get 30% each”) or does one party own more than another party and pick
What is a patent?
A patent is an important piece of intellectual property. It can be the difference between you being able to build something useful and having to wait a year or two while someone else gets there first.
Patents are granted by the United States Patent and Trademark Office (USPTO) under the provisions of federal law. The process of obtaining a patent is called “patent prosecution.” The USPTO is a public agency, and anyone can apply to have their idea patented. The USPTO provides information and instructions on how to apply for patents, including how many different ways an inventor can combine their ideas, whether it will be advantageous to file in multiple countries, how much time each step takes, etc. The USPTO publishes several other resources as well:
You should also use this page for general guidance about filing for patents – it’s probably easier than ever before to file without having any clue what you want your invention to do, why it will work better than anyone else’s idea, etc.; but it’s still a good idea to read through the patent application guidelines because they provide important details which often aren’t obvious from reading the paper that comes with your application:
- Don’t just makeup claims based on what someone else invented – make them specific and unique enough that they clearly distinguish your own invention from theirs;
- Don’t file a single application unless you have three separate inventions that require separate prosecution;
- If you don’t have more than one invention that requires prosecution, don’t apply in multiples;
- Inventors who file too many multiplications are subject to denial of their applications;
- Patents issued after July 7th, 1976 were required under the old rules (and also granted using fewer procedures) but did not expire until 10 years after initial issuance; these expired on February 28th, 2010
The value of a patent
There is a lot of confusion around the value of patents to startups, and the reasons for this are many. I am not a lawyer so you should be aware that my views may differ from that of your local lawyer.
The first point is obvious: patents are unique in their value, so you should use them as such. But beyond that, many aspiring entrepreneurs incorrectly believe that the value of a patent is based on the number of years it has been held by the relevant company (the “expiry”), thus making it a “perpetual” asset. This is not true. Patents expire when they reach the patent office (in most cases one year or less). You can still use your patent even if it has expired – just don’t expect to make money from it until its expiry date has passed (unless the patent office suddenly tells you that its ability to do this on this date expires as well).
This sounds like an obvious point but there is also some confusion over how much time actually lapses between issuing a patent and losing control over it. This can vary greatly depending on how things work at each stage in the process:
- At issuance: Idea generation and proofing – this process typically takes 6 months or more;
- Patent application and prosecution – typically take 1-2 years;
- Granting IpPrism patent – typically takes 3-4 years;
- Expiry: Reaching an expiration date – typically 1-3 years after issue;
- Distribution/licensing royalties -typically 1-3 years after issue;
My conclusion on these issues depends very much on where you are starting from and what your specific circumstances are. For example, if you are starting from an idea, I would consider no more than a few months without prior management support to be “early” — despite having started with an idea! By comparison, if we start with management support then we have already started with “late” — meaning we have already lost control over our assets and should be thinking about why things aren't working right now instead of how long they will take us to get there. The exact timing depends on many factors (including industry dynamics) but in general, I'd say no more than 12 months after starting before we have any meaningful management control over our business. The only exception would be if something catastrophic happens (like a major failure or large capital loss)
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