Have you been developing anything in your spare time? Do you plan to use your creation that as a foundational element of your business? Do you have partners in your business? Did you know you can invest your intellectual property in your business? It is worth something. It is the same as money.
Different people bring different things into a business relationship. Some have money, some have ideas, some simply work hard. All of this has a value. One of the most underrated investments in a startup is the intellectual property. I see founders who don’t understand what they have brought to the table in intellectual property be bullied into receiving less equity or forced to put up more money. Did you know you are not required to invest all of your intellectual property into the company?
Intellectual property has a number of rights associated with it. For today, we will focus on giving away your rights versus simply allowing someone to use them. This is known as transferring (giving up all rights) intellectual property or licensing (allowing someone to use permitted rights) the same property. This is something that is not commonly considered when starting a business. Intellectual Property has a value. Sometimes (many times), the intellectual property is worth more than the actual value of other investments of cash or property by other partners. This can lead to an unfair (though likely unintentional) dilution of the one who invested the intellectual property.
This matters because it is difficult to make a determination of the value of intellectual property at the time it is used as an investment for your startup. So, what do you do?
Put whatever agreement you have regarding the intellectual property you invest in writing.
Whether it is a license or a full-blown transfer of the intellectual property, it is important the document is in writing. This is important for you if you are the one contributing the intellectual property or if you are a member of the company that is receiving the intellectual property. Like so many other aspects of business, there is no problem as long as everyone is working together, but what happens when things go south? You need to have a written agreement outlining what happens with the intellectual property.
What are my options?
The most straightforward example would be a full transfer of intellectual property. This is common in startups, whether or not you have partners. This places the ownership of the intellectual property in the company. That means, it is an asset of the company. The company is responsible for the intellectual property. This ensures the limited liability protection you are seeking from the entity you formed to run your business. If you completely transfer the intellectual property, your continued work on it becomes on behalf of your new company. This is, by far, the simplest way to handle investing intellectual property into a company. It takes it completely out of your hands recognizing that the entire reason you built the intellectual property was to build the company.
But, can you get it back?
The intellectual property is going to be an asset of the company on a transfer. That means, if the company is dissolved or sold, the intellectual property you created would be sold or used to settle debts. If you want to ensure the property returns to you, you would need to have language in the governing document of the Company that returns the property to you on dissolution and winding up. The property would be valued and returned to you as part of your distribution when the company ends. The problem with this is, if the asset must be used to settle debts, you will not get it back. That is where a license comes in.
Why would I license my intellectual property to my own company?
With the difficult in valuing intellectual property early on, there may be a benefit to creating a license structure of your intellectual property for the beginning of your company. This licensing structure could be based on the gross proceeds of the business. It could be based on a flat fee investment structure. It can be based on your continuing work on the intellectual property. Licensing the intellectual property to your business makes it a sound investment for you. This is the equivalent of loaning money to your own business. Sometimes it makes sense because of the way the other parties are investing. If you have 250 hours into a software product and your business partner plans to put cash in to cover the initial $1500 of expenses, you will be getting the short end of the deal. What is more, you will likely continue working on your software product, meaning you will be putting more hours into the product and further diluting your investment.
Investing your intellectual property in your business should provide you a return. If you are investing intellectual property and your partner is investing cash in an equivalent amount to your time investment, transferring the intellectual property may make sense. You need to understand your rights and how you are investing, to ensure you are not receiving the short end of the investment.
Licensing your intellectual property to your business may provide you income that is separate from your earnings from the business. Similar to interest payments on a loan from an equity partner of a business, licensing intellectual property can provide a legitimate expense to the business and give you the ability to make money proportionate to your investment in the company.
What if I do want to sell my intellectual property?
If you begin with a license, you may want to leave an option to purchase in the agreement for your company. That way, if everything does go well and the business takes off, the company can either give you more equity (increasing your ownership in the company) or pay more money for you to full transfer the property to the business.
Thinking through the way you invest your intellectual property into your startup is important to make sure you are not “giving it all away” before you know what it is worth. Maintaining the ability to keep your intellectual property provides you some level of insurance that you won’t just lose all of your hard work if the company doesn’t make it because of circumstances outside of your control or of your intellectual property.
Just wanted to give you something to think about this weekend. Keep working on that dream. Keep building your intellectual property, just invest it wisely. You work hard to create intellectual property, just like investors work hard to make money to invest. You should invest it wisely.