So a little about me . . . I’m a corporate M&A lawyer working out of Salt Lake City, Utah. As you may know, Utah’s tech and venture capital scene has been exploding recently. It’s been awesome to be part of more and more Utah company acquisitions and venture capital financing rounds.
One thing that I have noticed, which may also sound a bit self interested but is true, is that startup business owners often leave a significant amount of money on the table in these deals because of a lack of careful and thoughtful upfront legal work.
There are two areas where startup owners lose money in these transactions: (1) in the valuation of the company, and (2) in the negotiation of indemnification reserves.
Valuations of startups are typically based on a combination of the company’s EBITDA and a multiplier. The negotiation of the multiplier is often where business owners make or lose millions, or, in the case of those majestic unicorns, billions of dollars. Given there are market conditions and business aspects that influence the multiplier, but the ability to negotiate an above-market multiplier or being forced to take a below-market multiplier is generally a function of buyer or investor comfort with the cleanliness of the deal and lack of risk being assumed.
Indemnification reserves, on the other hand, are significant chunks of the purchase price in an acquisition that is not paid immediately to the seller but held in escrow for a period of years to be used to pay the buyer if assumed risks turn into actual liabilities. This is another place where startup owners gain or lose money.
One of the key areas where startup business owners gain and lose money in these valuable negotiation points is in intellectual property ownership. There are three basic intellectual property rights:
Most if not all businesses need a trademark or two or ten or at the very least need to take into account the availability of trademarks in determining its business name and brand.
Step 1: Name and brand your business in a way that can be protected by a good strong trademark and register that trademark.
Nothing is worse than to start a business under a certain name and build a brand to then learn you have to change your brand because you are infringing on another business’s trademark. So the first moment in time that trademarks should influence your business is from before you form it and give it a name.
Step 2: Protect and enforce your trademark rights.
So now you have a business and a brand, what does a trademark do for your business? Trademarks protect against other companies using the brand you have created to advertise and sell competing goods and services under the same or confusingly similar brands or logos. This not only limits exact copycats from branding in your name or like you, but if their name is confusingly similar or their logo’s look is confusingly similar you can protect your rights and block them from trying to take advantage of your hard work in establishing your brand.
If you notice that another company is using your trademark or a mark that is confusingly similar in your same space, to keep your trademark enforceable you need to send them a cease and desist letter immediately and take whatever steps necessary to protect your trademark from being used and having its value diluted
Step 3: Keep your trademark current and don’t let its registration lapse.
Like diamonds, trademarks can be forever, but trademarks once registered need to be renewed every five years and need to be used during that period of time to be extended.
Having strong and defensible trademarks can increase the value of your business significantly especially when it comes to selling your business or raising money through venture capital or other channels. When potential buyers or investors come along they are going to want to see that you have a strong and defensible ownership in your brand and the best way to do this is to have registered trademarks. When a potential buyer or investor comes along and realizes that you don’t have a trademark or haven’t been protecting that, your valuation will immediately go down.
The next most commonly used intellectual property right in startups and businesses are copyrights. Copyrights are not just for visual art, literature, or music anymore, but now are commonly used to protect rights in source code and professional writing materials.
Copyrights are different from trademarks in that they are used to protect the unauthorized duplication, sale, or use of the copyrighted materials. This becomes most useful to tech startups that invest a significant amount of money in writing proprietary source code for their business that they want to protect from another company from using. So if you have done this and own valuable, proprietary code that is not open source, you should definitely get it copyrighted.
Also unlike trademarks, and diamonds for that matter, copyrights are not forever. Copyrights only last 70 years. Like trademarks, potential buyers and investors who see that your source code is protected from imitators and other infringers will see a lower level of risk and the strength of your owned rights will no doubt boost the value of your company.
Last but not least, Patents. Patents are generally the least used of these intellectual property rights. That is because they can be really expensive to register and not every business lends itself to patents.
Patents are very common in the science and high tech companies who are making non-obvious and novel inventions. You can also use patents to protect non-obvious and novel business processes but to do so successfully, those processes need to utilize some form of novel technology or science.
Like copyrights, patents are only valid for 70 years, and then after that, the technology can be used openly by anyone.
While patents are the least common form of intellectual property rights, patents are also usually the most valuable of the intellectual property assets of a company, especially at the time of acquisition or investment.
The Long and Short of It
While this is obviously a very general explanation of the basics of intellectual property rights and how they can increase the value of your business, there is much, much more to say on these topics. The take home lesson about intellectual property rights for the business owner is the stronger your portfolio of registered trademarks, copyrights, and patents, the better position you are going to be in to negotiate the highest purchase price or valuation of your company and also decrease indemnification reserves.