Copyrights, Trademarks, Trade Secrets, Patents, and IP Monetization

One of the things I don't discuss that much here historically is intellectual property and how startups tend to fail in its application. So I thought I would discuss these issues in the context of my personal experience. As you are or should be aware, I am not a lawyer, and you should seek legal advice for legal issues, which this discussion is closely related to.

What is IP?

For computer network geeks out there, I am not talking about the Internet Protocol (IP) but rather about intellectual property (IP). In particular:

• Patents: These are processed through governmental bodies and, if successfully prosecuted, become exclusive rights to make or use methods, systems, combinations of matter, or processes. It becomes a civil violation for others to "infringe" on a valid patent for the duration of its applicability (usually 20 years from first filing), and you can sue or be sued for infringement. This provides barriers to entry and stickiness to help gain market advantage in areas you pioneer. It does this by announcing and telling everyone how you do it to the point where they could do it or improve upon it, and in exchange for sharing your know-how, you get exclusive rights.
• Copyrights: These protect (limit) the right to copy your original works, including things like paintings, pictures, written works, movies, songs, and so forth. This provides control over making copies, selling copies, presenting copies in public, using them for commercial purposes, and similar things, but is subject to "fair use". Fair use includes quoting in scholarly articles, making a single copy for personal use (in some cases), quoting for criticism, and so forth. From a business perspective, this keeps others from simply stealing your software source code and using it without the potential for paying out in a civil case and also permits governments to stop your use of it in some cases through "takedown" actions and so forth.
• Trademarks and Trade Names: Angel to Exit™ is a trademark of one of my companies. If you use it to sell yourself, you are stealing my reputation, and I can force you to stop or pay a fine for its use (possibly including court costs). But to enforce it, you have to mark it as a trademark consistently so as to make certain others have notice, and it has to be sufficiently unique to not be things like "Coffee" that are already in widespread use. This provides branding which has reputational value as you get recognized in the marketplace.
• Trade Secrets: These are secrets - limited to a known set of people who have agreed to keep them secret and protected as secrets by not disclosing them except to authorized people in authorized ways. In order to be useful, they have to actually be valuable and secret. For example, the formula for Coca Cola was useful (it allowed you to make the drink nobody else could reproduce) and valuable (a taste nobody else had and that the market loved). It was also a closely guarded secret. But others eventually came up with their own formulas, so the formula is not longer as valuable as it might have once been, but the name is still valuable as a brand, thus the protection of brand by trade name and marks.
• 3rd party IP: It is quite common for companies to use 3rd party IP, such as the operating system for your computer application, or the special coating you use for your product cover. You of course end up having to compensate them for that usage as others have to compensate you for yours, sort of.

These are the core components of intellectual property from a legal perspective (I am not a lawyer and you should ask one to be sure). And from a business standpoint, they form the basis for barriers to entry and stickiness as well as ultimate monetization of the company.

Monetization

This is a strange word - it means turning something into money - sounds like turning lead into gold, which in essence, it is. That is, you spend time, effort, money, and other resources creating this heavy stuff that you have to carry around with you and care for properly, and the object is to make this profitable by turning that weight into value for your company. How do you do that?

• Sell or license it: The obvious way to make money from IP is to have other people pay you to use or possess it. They buy your book, pay for use of your software, license your patents for their own business, use your trade secrets to make their beverages, and so forth.You get money, they get value. OR you can trade or bater contractually, so they get to use your stuff and you get to use theirs with possible proportional financial exchanges.
• Exclude others: You can make money by keeping others from doing what you can do as well as you can, for the same cost, or under the same conditions, and so forth. That creates barriers for them entering your markets and, if you are providing something valuable to customers, stickiness as they stay with you for the advantages you bring, or perhaps because it's harder or more expensive to change.
• Build brand and reputation: Brand and reputation are hard to turn directly into money in the sense of associating a dollar value with them. But legal proceedings have had juries decide that they can be worth a whole lot, and frankly, these tend to reflect your actual performance in the marketplace as people talk about you in a nice or mean way, share the name, it becomes cultural, and people even come to love the personalities associated with the brands. Long after the music is no longer the same, the name brand of the band lingers. That means people come to and pay for the concerts even long after the original band members are gone.
• Leverage for perceived value: Many investors and others revere IP of one form or another as indicative of accomplishment and value. Merely having patents applied for or issued may be a basis for investment or respect beyond what is actually the (monetary) value of the IP itself. I might have a crappy patent that would be invalidated if it ever went through the legal system, but it might never even be read by an investor seeking a better investment than the competitor who doesn't have any patents.
• Deprecate the value of others: Many folks claim to have amazing capabilities, but one way to counter their asserted value in the marketplace is by making a similar capability very quickly and inexpensively to show that the competitor is being overpaid and that you are more valuable or better at it than they are. This brings competitive advantage through the claim that if they want the real expertise they should come to you. And the IP demonstrates the difference in value by trivializing them or showing you have "more".
• Meet or exceed expectations: IP can often be used as leverage for efficiency or effectiveness, even if nobody else knows you have or use it. They charge $15,000 for service X, you charge the same, but do a better job in less time because you have something they don't have, in this case, the special sauce that gives you better results for less effort.

So turning IP into money makes sense.

And exit value

But perhaps the most interesting value IP brings is exit value. Companies buy companies for many different reasons. Generally, there are strategic and financial reasons, and IP plays into both.

Financially, a company might buy you because it can leverage its customer base to sell your product or service, thus making more money for them than the amount they pay you. Or they might buy you because you are making money and they think the price is better than other ways to spend or invest their excess cash.

Strategically, they may want to enter a new market and buying is better than building because of cost, uncertainty, and time to enter the market. Or they might buy you to counter a legal issue they are having within a competitor.

It is my understanding, on information and belief, that there are quite a few cases where a big company bought a smaller one because the smaller company had patents that could be leveraged against another large competitor in a legal action already underway. Company A sues Company B over a patent issue, Company B buys Company C to gain patent ownership of patents that can be used against Company A, and the suit gets settled by each agreeing to cross license to each other. The cost not spent on the rest of the law suite: $10m for each company. The possible loss avoided by Company B: $100M. The purchase price of Company C: $8M - It's a bargain.

The mix

I generally believe in a mixed strategy when it comes to IP. I have some of each, patents, copyrights, trade secrets, trademarks, 3rd party property I use and protect. Over the course of decades, here's what I have found:

• Patents: Expensive to get good ones, I have made money (net) on them over the years but it takes a long time, and if I accounted for all the time spent, it might not be break even - but I am still continuing with them.
• Copyrights: I copyright everything by marking it religiously. I don't file government documents unless I want to really enforce it with a law suit. So far it has kept my value and reputation in reasonable control with almost no cost or effort.
• Trademarks and Trade Names: I have several and enforce them, almost always by giving notice and people then stop infringing. They are inexpensive and easily gained.
• Trade Secrets: I have quite a few of them and I leverage them for business advantage all the time. It costs a bit to protect them, but then this I have to spend in any case to protect client confidential information.
• 3rd party IP: I use it all the time - and protect it in the same manner as I protect my own content of similar type.

The price you pay

In my experience, most startups do not protect patents as they should, either not filing or meeting filing requirements properly, or filing ridiculous ones that either never make it to patent issuance or are worthless except for reputational advantage from funders. They spend money in the wrong ways on the wrong things, and it contributes to limited success in both the sort and long term.

Copyrights are so simple and inexpensive to mark on documents, I think anyone who doesn't bother to do it is making a mistake.

Trade secrets really should only be used when you have actual secrets that have actual value. Many companies have them and don't differentiate them well from other content, and don't properly protect them and contractually enforce them. Then others have massive language regarding trade secrets in all sorts of documents that are basically a waste of time and mental space. A good non-disclosure is always appreciated, if properly scoped and characterized. But I won't sign one for information that should be public or is ultimately public, and some inventors overuse this to ill effect.

Trade names and trademarks are good branding and should be used within reason. They are inexpensive to get, but do require discipline in use to keep them in effect.

Conclusions

In this complicated area of law and business, it's important to consider the issues carefully and early in the process. A certain level of maturity in a business leader is required to do this well, and legal advice from real lawyers specializing in these areas is important to success.

More information?

Join our monthly free advisory call, usually at 0900 Pacific time on the 1st and 3rd Thursday of most months, tell us about your company and situation, and learn from others as they learn from you.

In summary

IP is one of the cornerstones of a good company foundation, and should be well tended and carefully considered.