Hold Off On IP Holding Companies?
I have an IP holding company which owns all my patents and licenses them to my startup. I am deep in diligence with a potential Series A investor who says it will not invest unless I assign all my patents into the company first. Can I avoid doing this?
Absent a few unusual scenarios which I will address shortly, I am with the investor on this one. Few investors will invest in a company which does not have full title to and ownership of the intellectual property it needs to operate, with some exceptions.
What if you leave the company? Does the license expire? Even if it does not, can you play games with the patent and use it as leverage later? Who will maintain the patent and prosecute it worldwide (and who makes those decisions if you and the company are not aligned on strategy)? What if the patent must be defended or enforced? Who pays for it and who controls the legal decisions and strategy? If the company is sold later, can it be sold for full value without ownership of its core assets? Who owns improvements to the licensed patents? Is money being extracted from the operating company to pay for the “license” which otherwise would go to operations and growth? Some of these points are not merely business points, but can have serious legal implications for the ability of the startup to enforce its rights and protect its market if not handled correctly.
Sometimes it does make sense for a founder to retain patents in a holding company. The most common reason is that the patent rights have multiple, compelling applications in different fields, each of which should be exploited by a separate operating company. In these cases, you can justifiably create multiple “field of use” licenses. You still need to address all the concerns above so investors know they are getting almost the equivalent of full ownership without the potential for games. Often, an investor will demand some ownership and control in the holding company and the decisions it makes about the patent rights.
There are other reasons why a startup may not own its patents even though one of the founders is the inventor. One example is when the patent is owned by a university or a funded research entity, where the institution owns the rights. Investors are accustomed to licenses in these situations.
I am left wondering why you want to avoid assigning your patents to the company. Although some legitimate reasons may exist, the usual reason is the founder is not “all in” on the startup and wants to hedge her or his bets or have leverage over the investors later. I do not consider those valid reasons, at least if you want money from top professional investors.