M&a · Acquisitions

Retain IP Upside post Acquisition?

Tim Scott

November 4th, 2014

I'm curious if there's a practical way for the shareholders (all or just some) of an acquired company to retain some "upside" in its IP. 

For example, say the acquired company has patent pending, and if issued there's a decent chance that a certain huge company could be found infringing and would likely license or otherwise settle.

Is there a way to structure an acquisition such that the founders (or all shareholders) of the acquired company might get a share of future settlements or licensing fees pertaining to this patent?

It has been suggested that it could be some kind of "earn out" with rights to audit periodically. Let's also assume that not all founders stay on as employees of the acquirer.

Has anyone crossed this bridge or have some insights? More trouble than it's worth?

Tom Hansen Technology Executive & Entrepreneur

November 4th, 2014

"Earn out" is a good way to go. Just make sure that the payout structure to you and/or your peers is clearly defined. Is the payout based the company "Financial Structure" or the value of the income based on the deal transaction. 

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

November 4th, 2014

Am sure Mitchell will give you details but one approach is for the IP originating entity, meaning who owns the IP, to retain ownership but license it to the acquiring company. Terms could be no upfront payment for license with little or no ongoing payments but x% of cash proceeds when acquired company exits itself. 

Whether acquiring company is willing to do this or under what terms, including any impact on acquisition terms, is matter of negotiation.

Chris

C

Alan Matthews Entrepreneur

November 5th, 2014

Did the acquirer know about the status of your patent. We assume so. All that has been evaluated by the buyer and accepted as some future value. If you now want to rewrite the deal so you get "upside" which means retaining some present value in a future asset then you'll have to determine whether the acquirer also ascribed the same value you do to that asset.

If not (they don't care about your patent's ability to demand royalties from an infringer and don't think that's anything they'd do) then you may have some ability. The problem is that if I had acquired your company then I wouldn't want you to control whether one of my larger competitors got a demand for royalties. I need to control that process and not let prior shareholders be able to create business uncertainty. Who knows... maybe they'll counter sue for something. (I have been through this btw and it costs about $100K per month to litigate... for at least a year... without a trial!)

I would take the money... be happy... and move onto a more productive next project.

Good Luck.

a.

Tim Scott

November 5th, 2014

Alan, To be clear, in this case, there has been no acquisition yet.  I’m assuming that the IP will transfer to the acquirer and that they will plan to use it only themselves. There is no business plan to license it ever. However, let’s say a year from now when the patent issues, giant company X has build a large business around this IP. I am totally happy if  to let the acquirer decide to pursue a claim or not solely on the merits, knowing the costs and risks. They don’t plan to sue anybody; I don’t want to sue anybody, but it might be irresistible. (TiVo didn’t plan to sue anybody, but it made them a billion dollars.) The chance of a huge upside here may be small, but the upside is potentially large. My concern is that the acquirer will want to value the IP solely on their own use of it and discount any possible claim like this down to zero. My question is whether there is a feasible, if they refuse to place any value on this potentiality, I can say, “Fine, then you won’t mind to give us a share of it, since you say it’s worth nothing."

Rob G

November 6th, 2014

Tim;  i have crossed this bridge.  happy to chat offline.  i am not an attorney. patents are really really hard to value, patents pending even more so.  Even after a patent issues it is, by definition, absolutely unique (theoretically) and thus almost impossible to find "comps".   The IP 'industry' is pretty small, but there are a few players that have generated some ball-park data from which to start a discussion on valuation.  i can give you a name or 2.  Even if you think "Big Co. Inc." is infringing your patent is simply a legal basis to start a law suit and thus make lots of attorney's happy and your CFO sad.  But big company's like IP ammunition, both offensive and defensive.  There is a great deal of strategy that goes into patent portfolio creation and positioning.     A portfolio of patents, especially with early filing dates, with one or more continuations pending can start to pique some interest.   One way to see how the potential acquirer values the patents is to offer the company for sale with and without the IP.  most will simply say "we won't buy it without the IP".   And if your company paid the IP prosecution costs and if the inventor signed an IP assignment agreement in favor of the company then backing out the IP ownership will be hard and probably not worth the hassle.  One approach:  If we assume you are the inventor then you, the inventor,  pay the prosecution expenses out of your own pocket and don't assign the IP to your company, you simply grant your company a non-exclusive perpetual license to use the IP.  An acquirer's due diligence team will ferret out the IP license quickly.  From the hip i'd say if you haven't yet assigned the IP to your company then i'd say it's worth a shot.  If your company already owns the IP then it's a long shot and better to simply price it into the deal.  my $0.00002 worth.