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Why planning for IP ownership is critical for your business, and your sanity

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What happens when you are sitting down with your supplier, customer or contractors, discussing business or, a project or a product idea, and in the course of the discussion some valuable new intellectual property (IP) is identified?

It’s an inevitable scenario that can arise almost anytime you have a group of bright and innovative people gathered for a meeting.

The $64 million question is, “who owns the IP and who has rights to exploit it?”

The answer to that question might well become highly problematic, woefully expensive, and a major distraction.

Intellectual Property can be a vital and all too often singular asset for a company. Business owners and managers need to be aware of the potential for IP to add major value to their balance sheet as well as to add multiples to an exit valuation.

So, back to my question about what to do with spontaneous, accident IP creation and the resulting question of, “why should you bother to worry about it?”

The simple answer to the first question is that your company must have a clear strategy to develop and manage Intellectual Property, and recognises that IP, whether held as a trade secret or a patent, has the potential to be a major component of the company’s valuation.

The answer to the second questions is, “read the answer to the first question.” IP is simply way too important for any business owner or CEO to ignore. All too often IP is created unintentionally and, in that situation the question of rightful IP ownership can be a very vexing conundrum.

Hey, who’s in charge here?

As the CEO, or business owner, you have to ensure that all contracts with suppliers, customers and contractors have a specific clause dealing with new IP or improvements to company-owned existing IP.

I didn’t mention staff here, but clearly every employee contract must include clauses to ensure IP they develop is owned by the employer. Without this contractual protection, you risk having enormously valuable IP leak out and your company may literally miss out on millions.

A further complication is that you may end up in expensive litigation over IP ownership, along the way destroying important business relationships.

There is no substitute for correctly structured legal agreements that are worded to protect your IP position.

While there is clearly a cost associated with this, there is simply no alternative to good legal advice for any company that has revenue and profits, or any start-up company that has the foresight to allocate funds in the business plan.

Any investor, anywhere in the world, will recognise the value of ensuring that their investment is protected by quality legal agreements, and will understand that you are smart enough to want to capture and utilize IP. While this legal protection is the foundation for ensuring your position re new IP, there are other aspects of company management that have to be considered.

So, why then, in a business world wrought with tangible hurdles, should you really worry about IP?

It is very simply about money, in the form of enhanced balance sheet, revenue from licensing royalties, enhanced exit valuations and the potential to block competing products from your market.

Australian companies have created some of the world’s best and most valuable intellectual property. Historically, it has primarily come out of the research institutions and universities, and of course out of large and well-capitalised companies.

The irony is that Australian institutions have been full of great IP for decades but, they have struggled to generate a commercial return from all that innovation. In the last ten years that has been changing, thanks to a strong focus by national and local governments, institutions and university boards on having dedicated resources in place to secure commercial outcomes that provide a return on their investment and help fund further research.

Increasingly though, smaller enterprises have recognised that they are more than capable of developing world-class IP and that the value of that IP can literally make, or break, the company.

There is no doubt that patents and trade secrets can add substantial value to your company’s balance sheet. With some experienced guidance on the right strategy, it is almost certain that you have already developed IP that can add value to your operation.

The only sure way to fail, is to go to business without a plan

Even if you don’t already have some recognizable IP, through regular brainstorming with your team, it is likely that your company will eventually have to face the IP music.

As the cost of IP development/management is considerable, at what point do you commence?

What are the things you need to think about before you go down that path? How do you create a mindset in your company to continually recognise IP creation opportunities?

In companies around Australia there often isn’t a real awareness of the value of IP, nor is there a focus prevalent among senior management on identifying and capturing intellectual property.

Many companies will have very clever and innovative staff that is more than capable of devising, defining and developing IP that could be of enormous value. Without a culture and formal structure for the identification of IP, many, many opportunities are simply never recognised, captured and monetized for the benefit of the company, its shareholders, and staff.

Harness the power of thoughts

As a CEO, Managing Director or General Manager, one of the most important aspects of your job is to create an environment that encourages and supports identification of intellectual property.

There will be situations where a supplier, customer or contractor raises what could be new IP and simply doesn’t recognise the value of their suggestion. You and your staff need to be aware of how to handle this and, how to take steps to capture the IP for their company.

Your staff has to be trained to appreciate the value of IP and, the circumstances under which it is likely to be created. With this awareness and knowledge they are able to go about their daily work conscious and alert to developing the enterprise’s IP.

So, what do we do?

In the event I managed to stir your interest in this subject you may be wondering, “What can I do to implement some of these ideas?” I would suggest that you should consider implementing the following process:

  • Audit all the current legal contracts your company has signed for references to how IP is managed and highlight the clauses that deal with IP.
  • Verify that your employment agreements assign all IP to the company.
  • Ensure that all staff, suppliers, contractors and customers work with you under Mutual Non-Disclosure Agreements.
  • Ensure that your company has tracked all IP that it relies on to conduct business.
  • Consider using external specialists to develop an IP strategy that educates staff to be innovative and appreciative of the value of IP.
  • Develop a reporting methodology for your Board to make them aware of IP developments.
  • Identify appropriate legal resources to support your focus on maximising the value of IP for the business.

There is no doubt that management of IP has become a highly specialised function and an aspect of business that deserves a great deal of attention by senior management and a company’s Board of Directors.

In the past year, we have seen very large patent libraries sold off for billions of dollars, a clear recognition that IP ownership equals market leverage and revenue protection.

Final thoughts

The field of IP is undergoing enormous change because of the realisation of the incredible value it has in countries that are built on the concept of IP ownership.

A patent owner could file a lawsuit in China for a breach of IP and be awarded $10,000 after several years of litigation. The same patents could be prosecuted in the USA and an award of hundreds of millions of dollars for breach.

So, Anthillians, I trust you will agree that clearly the stakes are high and are deserving of your attention. After all, you wouldn’t want to let all that money float away on thin air, would you?

As a Senior Executive and Management Consultant Greg Twemlow has led diverse operations starting with little more than an innovative idea to grow to achieve sustainable profitable commercial reality. Along the way he has negotiated numerous global patents, securing IP and developing operational processes to provide a solid foundation for future growth. Connect with Greg on LinkedIn at: au.linkedin.com/in/gregtwemlow

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