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Capturing the Value of Intellectual Capital

Costs of Doing Incorrectly are Enormous

Why? Because whether planning to sell a business short term or long term, the costs of not capturing the value of intellectual capital are enormous - improper deal structures, lost financial opportunities, assumptions of greater execution risk, over/under payments for asset acquisitions. And without protection, a reasonable buyer would not pursue.

Intangibles, namely intellectual property such as patents, dominate the balance sheet of technology companies - large and small.  How is the value of this critical asset captured before marketing the business to potential acquirers?  Strategic and financial buyers perform IP audits of a target company. Below are issues that a potential acquirer will consider when evaluating a business and how to address.

Align IP Assets with the Valuable Aspects of the Business

Different types of IP provide different types of protection. What types are most important?  It depends entirely on your business - your current and future competitive market position, your business model, and industry dynamics.  It is critical when creating and capturing value in your business to engage your IP lawyer early in the process so as to understand the nature of your business and how best to protect what is most valuable. 

Patents 

For most technology companies, patents are the most important form of IP.  They can form a barrier to entry for competitors, be a source of potential licensing revenue, and may deter others from knocking on your door to complain about infringement of their patents.  When evaluating patent assets, a sophisticated acquirer will look at quantity, quality and flexibility.

Quantity

The size of the portfolio matters to many acquirers.  If resources allow, seek protection on all potentially valuable aspects of the technology. Filings on different aspects will make clear that the company is diversified.  Also, by protecting numerous aspects of the technology, the likelihood of having protection on aspects an acquirer finds most valuable - applications, markets, manufacturing methods - is increased. 

Quality

A sophisticated acquirer will dig in and evaluate the quality of patent assets.  How is quality assessed?  Again, it’s all about the nature of the business and whether the patent assets are tailored to protect what is most valuable.

Patent quality begins when the application is filed. A well drafted patent application does not merely describe technology.  It explains the concepts embodied in the technology that are commercially valuable, and makes clear that those concepts are broader than the specific implementation techniques described.

Claims

For an issued patent, the claims are paramount.  They define precisely what the patent covers.  A sophisticated acquirer will not be satisfied to learn that there is a patent on an invention, but will scrutinize the claims to determine how effectively the patent covers what is commercially valuable about the invention. Are the claims narrowly drawn to a specific implementation that can be designed around, or do they broadly cover any commercially viable implementation?  The answer is critical to the value of the patent, and hence, to the valuation of the business.

Is it crystal clear what claims the issued patents cover?  If there is uncertainty, find out before a potential acquirer does. Patent counsel needs to be able to explain precisely what the claims do and do not cover, and then assist in understanding the commercial value of that scope of protection for the business and potential acquirers. This knowledge will be priceless in understanding the value of the patent assets and how they can be competitively positioned with an acquirer.

Pending Applications

A pending application can sometimes provide even more perceived value to an acquirer than an issued patent.  While the specification of a patent application is fixed upon filing, the claims are not.  Thus, if the claims in an application fall short in protecting what is valuable about the disclosed technology (e.g., they are narrowly drawn to an implementation that could be designed around), the great news is that they can possibly be changed before an acquirer lays their critical eyes on the application.  Continuously perform diligence on pending applications and make changes necessary to the claims to ensure that they are aligned with the aspects of the business that are most valuable.  When a potential acquirer looks at your pending applications, potential value needs to be readily apparent, as this will maximize valuation.  Making sure claims describe all the valuable aspects in the application as broadly as possible does just that.

Jurisdiction

A last word on quality - patents are granted by governments and are jurisdictionally limited.  Thus, a patent must be applied for in every jurisdiction where protection is desired.  What jurisdictions matter?  Again, it depends on business.  An acquirer will be interested to see whether the patent portfolio protects the key geographical interests that are most valuable for the business.

Examine the portfolio with patent counsel and, where possible, take action to buttress any weaknesses. 

Flexibility – Keep Applications Alive and Options Open

Filing continuations of important cases can be extremely valuable. As mentioned above, while the specification of a patent application is fixed upon filing, the claims are not.  Most deficiencies of an issued patent in failing to adequately protect the commercially valuable aspects of the technology can be fixed in a continuation application … but only if a continuation application was filed before the patent issues.

No matter how care is taken in crafting the claims of issued patents, filing a continuation for any important cases will provide flexibility to adjust the scope of protection for numerous unforeseen reasons, including:

  • Weakness not appreciated in issued claims comes to light - a weakness raised by a potential acquirer
  • Market changes result in a different prioritization in determining what is most valuable about the technology 
  • Potential acquirer sees value not originally prioritized in protecting an aspect of the technology

Filing continuations of important cases can dramatically increase the value of patent assets to an acquirer, thereby increasing the value of the business.

Other Forms of Intellectual Capital

While patents are the most important IP of most small to mid-market technology companies, other forms of IP can add significant value.  For example, if there is significant market recognition and goodwill in a brand name or mark that an acquirer may wish to retain, consider whether there is proper protection of these trademark rights, as failing to do so can hurt the value of the company.  Similarly, there may be value in some technology that the company developed that is best protected as a trade secret, but specific steps need to be taken to ensure that those rights are properly protected or they may be lost.

Determining whether other forms of IP protection make sense depends entirely on the nature of the business.  If not already engaged with IP counsel about whether IP is tailored to best protect the business, doing so now can add strategic value short and long term. 

Dot I’s and Cross T’s

Pay due attention to the details in protecting IP.  In performing IP audits, it is shocking how often problems with simple, best practive formalities arise that devalue or even crater a deal.  Some simple steps include:

  • Clearly document all IP ownership by the company - not the inventors or creators
  • Establish non-compete agreements with key employees
  • Use non-disclosure agreements (NDA) whenever possible when disclosing confidential material outside of the company - suppliers, customers, contract manufacturers

Address Concerns on Infringement of Rights of Others

Most acquirers will be interested in determining whether there are obstacles to their commercialization of the technology. If freedom to operate searches have been performed or patent holders have given notice about potential infringement, be prepared to answer pointed questions about the results and why the coast is clear.  If good answers are not there, invest time to develop answers so as not to be caught off guard in the diligence process.  Investing now to develop a well-crafted position can pay huge dividends in alleviating the perceived risk of a potential acquirer and prevent the business valuation from suffering from uncertainty about commercializing the technology.

Put the Right Team in Place

Putting an IP team in place that can cross the finish line with the plethora of issues the can come up during the diligence process is critical.  The team, headed by a senior IP attorney, needs to have experience in the diligence process and the range of IP issues that can arise - including patent portfolio development, clearance and non-infringement counseling, litigation, and counseling on a host of business related IP issues. 

Also, many issues can be highly technical.  Team members need to be well versed in all key technology areas.  Photonics technologies are enabling - generally, more value is captured and higher barriers of entry are created with products and services higher on the food chain.  These products are inherently technically interdisciplinary.  A solid state lighting company may have core material science, optoelectronics packaging, and semiconductor processesing IP.  A medical diagnostics company may have differntiating proteomics, imaging/spectroscopy/interferometry, surface chemistry and assay content IP.  A technically diverse IP team can often best capture the value of a photonics technology business.

Authored by Rich Giunta and Tommy Franklin of Wolf Greenfields' Electrical Technology Practice Group with expertise in optics and photonics.  <Read more>