Protecting IP in Partnerships
A Scenario-Driven Analysis of IP Best Practices in B2B Partnerships
About The Webinar Discussion
The following transcript is from the webinar Protecting Intellectual Property (IP) in Partnerships; a scenario-driven webinar discussion on how to leverage best practices for IP protection to build more secure, mutually-beneficial business partnerships.
During the webinar, we discussed intellectual property implications for three types of partnerships:
- A Software Integration Partnership
- An International Marketing Partnership
- A Blockchain Consortium
The webinar was hosted on June 25th, 2020, and featured commentary from Evan Smith of Cogent Law Group, Steve Oster of Oster McBride, and myself, Kirsten Pomales Langenbrunner of Coalitions Consulting. Thank you again, friends, for the incredible discussion.
Introduction to the Webinar
Kirsten:
I just wanted to thank everyone for coming out. This is Protecting IP during Partnerships. So it is going to be a discussion that’s very scenario-driven. And we’re gonna be looking at how to best leverage the best practices for IP Protection to build more secure, mutually-beneficial partnerships with your partners.
So, today’s discussion is gonna be geared to specifically tech companies but a lot of the things we’re gonna be discussing today are broadly applicable as well across various industries.
We have two guests for today that I’m very, very happy to welcome.
We have Evan Smith who is a partner at Cogent Law Group. Evan is a true software and hardware IP expert, with experience on both sides of the legal and scaling a business side of working in this industry. He is a serial entrepreneur, high-scaled multiple software and hardware companies over the years. And not only that, but he has worked with dozens and dozens and dozens of companies on questions of IP Protection. We’re very, very excited to have him for this discussion.
Next, we have Steve Oster. Steve is a partner with Oster-McBride. He has over 20 years of legal experience spanning commercial, securities, contract, anti-trust employment, and insurance litigation. Steve has done a lot of litigation, so he knows what people fight over. He knows what frustrations can come up with partnerships that you have to watch out for, that you have to prepare for. So, he’s gonna add a lot of insights from that side of things to our discussion today.
And then, I’m Kirsten Pomales Langenbrunner, Partnerships Officers at Coalitions Consulting, which is a firm that works to help entrepreneurs and the tech space connect with business to business partnerships. So that’s everything from marketing partnerships to integrations partnerships and some of the styles of partnerships that we’re gonna be discussing in our scenarios today.
That’s a little bit about us. I think we can jump right into the discussion.
In today’s program, we’re gonna go through three partnership scenarios. Each example is gonna raise a different set of issues. And our guests will talk about the ways the structures, the business arrangements, and intellectual property under each scenario.
In the first scenario is gonna be a Software Integration Partnership.
In the second scenario is gonna be an International Partnership.
In the third scenario will tackle joint product development by a Blockchain Consortium.
Let’s jump right into it!
Scenario 1: The Software Integration Partnership
from Evan’s slideshow during the Protecting IP During Partnerships webinar
The integration partnership that we’re going to be discussing in Scenario 1 involves two software companies. One is a company that helps facilitate user account administration and the other is a company that is a marketing automation software as a service (SaaS). So one of the values of integration partnerships is providing additional value for each company’s user bases. So you know these companies decided to enter into an integration partnership. I was hoping Evan and Steve could tell us a little bit about what these companies need to have in mind when engaging in such a partnership. And what they need to watch out for.
Evan:
The first scenario that Kirsten gave us to talk through is we have a software as a service company that is a marketing expert and has marketing software. And they need a solution for user account management. So they wanna do a partnership with User Account Experts, LLC, who are going to provide them, as you see in the slide, with basically the Login and User Account Management functionality for their cloud-based software as service. As Kirsten said, not too complicated a scenario but there are a bunch of things we need to look at in terms of the Intellectual Property there.
Scope of The Software License
The first thing that we need to check out is the scope of the license. We’re going to be getting some kind of a license from the company that has the user account management software or services or functionality to the saas company, in order for them to be able to use this in their operations and deploy it to their end-users. One thing to figure out at first is this is gonna depend on the structure of the technology involved. The user account management company might be just providing a software package that they’re going to integrate directly into the saas servers and use that to manage things. Or maybe it’s a server-based operation and the user account management people are gonna be providing a service of managing the accounts, managing the database, and linking it to the saas server and things like that.
The first thing to do is to figure out is: what is this? Is it a software license? Is it a service agreement? Is it both? What are the software people providing to the saas company? Is it source code? Is it executable? And then, what rights does the saas company need in order to perform the functions that they want to perform? When they got the right to integrate it with their system in some way and deploy it to end-users, do they need the right to modify any of the software or adapt it to make it work with their system? And that goes back to the question: do they need the source code or are they just getting either the services or executable modules? They’re gonna need to grant a sub-license to allow their end-users to use whatever functionality their license is obtaining.
Then there are other things that are obviously important in the agreement are royalty structure. How do they get paid? Is a per seat — per user? Is it per month? There are all kinds of different ways to charge for something like that, that has to be negotiated out. And it has to be put in the agreement in such a way there aren’t loopholes so that they think they’re gonna be paid for a million users but then they find out that they only need to run only one copy of the software in order to serve them so they’re only gonna get paid one. I’ve seen that happen.
Who operates the database? Who controls the data? Who owns the data? What happens to the data when the agreement terminates? What else happens at expiration? What’s the duration of the agreement? Are there extensions? Are there rights to renew? If they decide not to continue after a certain point, how does It transition or wind down?
Due Diligence and NDAs During Partnerships
Steve, you’ve done some work on due diligence and working at deals like this. Wanna comment on that?
Steve:
You know before, either company enters into this arrangement — before they’ve even located each other, each of them may have gone on through a third party. And, asked that third party to match them up with a suitable partner. In each of those situations, they are going to be subject to and performing some type of due diligence.
And If in the course of that due diligence, they’re going to have to give access to their intellectual property, they’re going to have to enter into some type of non-disclosure agreement or NDA. And of course, as they get closer to the ultimate deal, the scope of the diligence is going to expand and the importance and probably size of the NDA is going to expand.
There are common elements to all non-disclosure agreements. What we’ve made available for you are two types of agreements protecting intellectual property. Other proprietary information of the company is simply referred to as confidential information. Indeed, if you get involved in litigation at any point over one of these deals, it is more likely than not that the court will have a protective order that the parties use in order to protect confidential information that might be turned over during discovery. And all of these agreements are intended to allow a company to open itself up to the extent necessary in order to allow potential suitors to value the company, to value the IP, to figure out what’s the best way to achieve the goals of that particular partnership. Evan pointed out that there are several different ways that the companies could structure their deal. depending on how they structure the deal, which I think will affect the scope of the diligence. The scope of the diligence may, in fact, help determine how the deal is ultimately structured. So, we’re gonna need to enter into some type of non-disclosure agreement.
These agreements are pretty much straightforward. Our example, which I believe that Kirsten has made available, is a mutual non-disclosure agreement that is particularly appropriate to the first scenario. And you’ll see it’s available to you on google docs.
The Components of an NDA
And all of these agreements essentially have five components.
First, the definition of what is going to be considered as confidential information. If you scroll down a little bit, you’ll the definition of confidential information and you’re going to want that as broad as possible without making it so over-broad that virtually everything becomes confidential that it loses its meaning.
The second component is who is going to look at this information. You typically have a disclosing party and a recipient party. And the recipient party may invite third party representatives: an investment bank — if it’s some type of an M&A deal; a hedge fund — if it’s an investment. We wanna make sure that any third party that gets involved is also bound by the same rules.
The third component that you always see is standard. What is the standard for protecting intellectual property which may now become known to a third party? The standard I like to use is at least the same level of protection that the company uses to protect its own intellectual property. Looking at potential litigation, it becomes very difficult for a defendant to argue that it’s not a reasonable standard of care. You want to maintain control over your information. You want to decide what type of encryption is used. You want to decide how many copies of percipient documents are exchanged, how they’re numbered.
And finally, you want to look at termination and remedies. In terms of termination, you wanna make sure that any party that has come into contact must return it or certify that it’s been destroyed. And then finally, in terms of remedies, one of the problems that you may have is that with IP, once the information escapes, it may be difficult to put the broken egg back together. You’re gonna want to go to court as quickly as possible to get a Temporary Restraining Order, preventing any disclosure of your information, if it’s even threatened. So, we always include a provision that requires the other party to accept the fact that injunctive relief — TRO, a preliminary injunction — some type order will be attainable in order to restrain any further distribution of the information. And everything else is, I think, pretty straightforward. Things that are intuitive — how you define the information, you need to exclude what is already in the public realm. But, on the other hand, you want to make sure that if the other side is going to say, “Oh, we already knew about that”, that they have some written evidence that pre-dates your making the information available. And so we build that into the NDA as well.
We can take up the whole hour of my going through each provision. But those are the five points that you wanna make sure you have control of in any deal and in any employment situation.
Kirsten:
FYI for you guys, there’s a link to the NDA that we just walked through. If you want to put that for personal use, that is available to you.
That is awesome. There was so much content in there. I hope you are taking notes but if not this is going to be recorded and posted online. So you can sit back and watch it four times and keep absorbing all this fantastic information.
Steve:
The pandemic is gonna have to last quite a long time before this gets to Netflix.
Evan:
Steve, I think you’re a Netflix fan, at least. Maybe when the theaters are opened back up.
NDAs Shouldn’t Replace Trust
It’s important to keep in mind that you can have an NDA that protects you. But if you end up in court or in some venue enforcing your NDA, then you’ve had a big problem and you’ve already kind of lost. Don’t want to have an NDA being a substitute for trusting the people you’re dealing with. You should really have both.
Steve:
The Reagan approach of trusting and verifying probably applies here.
Evan:
Just because you have an NDA doesn’t mean that you have to send over all of your confidential information the next day. Most experienced negotiators do when they’re trying to put a deal together is to give information that is needed at this stage. So if you’re negotiating a manufacturing deal, you don’t have to send over the blueprints for the whole product on the first day when you’re just trying to figure out what their pricing is gonna be, the ballpark, and the production capability-how many units can they produce. You’re trying to figure out about things like that so you can give generalities about your product at first. And as you go forward and it becomes clear you really are approaching doing a deal, at that point, you give them a lot more detail and ultimately everything you’re gonna need.
Kirsten:
Just bouncing off the whole trust concept. Any group who you are making it far enough along the due diligence stage are creating hefty NDAs and sharing information, you should already have a degree of trust with that party at that point. You have to establish that trust as early on as possible. Because when you’re looking at partners, you want to not just be seeking a partner for partner’s sake, but you wanna be vetting you people. You wanna be finding the best partners possible.
Scenario 2: The International Partnership
So, Scenario 2 is a little bit more complex but is very applicable for teams that are looking to explore markets in another nation. So a database management company based in the US is looking to break into the South East Asian markets. In order to do so, they’re exploring partnering with a South-East Asian company who is also in the enterprise software space to jointly relaunch and market their product in this market. So these two companies are not building anything jointly. But they will jointly making marketing material, publicity material, etc.
What should they keep in mind while doing so? And how does a cross-continental aspect of this relationship impact? How should they go about structuring it?
from Evan’s slideshow during the Protecting IP During Partnerships webinar
Basics of B2B Marketing Partnerships
Evan:
Awesome question and Steve and I will try to give some insights.
What are some of the terms we need to think about when creating a marketing agreement — negotiating a marketing agreement, talking to these potential partners, and trying to figure out whether they are the right partner? These are some of the things I would be thinking about.
First of all, what is the territory? Define what South East Asia is. And is the particular partner able to market throughout South East Asia or only in particular parts of it? It’s a pretty big area.
Exclusive vs. Non-Exclusive
Question number two: Is it exclusive or non-exclusive? Are you going to have just one representative or vendor or sales force in that whole region? Or might you want to have multiple companies reselling your software? That turns out to be a pretty important issue in terms of your strategy in terms and in terms of the agreement. If you’re giving people non-exclusive licenses, there isn’t that much concern about them not performing because you can always just choose to get more salespeople if those salespeople aren’t doing anything. If you’re giving an exclusive right to be reseller throughout South East Asia and they’re just falling down on the job, then you’re not getting any sales and you don’t have an easy way to fix that. What most exclusive agreements do is put in sales quotas that they have to meet in order to maintain the exclusivity or maintain the agreement. Exclusive and non-exclusive deals can have specified effort levels. They have to invest so much money in marketing. They have to have so many people working on it. They have to do so many trade shows. You can define that it so many different ways they have some sort of expectation about the effort that they’re gonna put forth.
Pricing Rights
Another question that really impacts your pricing and your ability to maintain your pricing is how you structure the deal in terms of who the seller is. The seller is actually the one transacting with the purchaser and that might be U.S. company and the overseas company is basically acting as the salesperson and getting a commission but the purchase goes back to the U.S. and happens from the U.S company. Or you could have a reseller structure where the partner buys the product from the U.S. company at wholesale and then sells it in their market at whatever price they can get. You’ve all heard gray market products and sometimes you can buy a really expensive piece of electronics in the U.S. and it doesn’t have a U.S. warranty because it was sold in some other country as new and then brought in here — that’s gray market. If you allow people to sell your products in other countries for less money than you’re selling it here, you risk people going over there to make the purchase instead of buying your full price.
Branding Rights: Watch Out! These Can Get Sticky!
Another important term for this kind of agreement is terms around branding and how that is going to work. You wanna maintain control of your trademarks, particularly your foreign trademark rights. One of the things that happens a lot in international deals is that the reseller or sales agent in a particular country will be the one that’s advertising out there and under the local laws, they may be the one that actually has the trademark rights in your name. So then the day you want to get a new agent over there, you find out that they registered your trademark in their country and they own your name in their country and that’s really difficult to walk back after it’s happened. So one of the things you wanna do is maintain brand usage guidelines and approval processes for their use of the trademarks. The agreement should say that any foreign trademark rights and registrations will end up belonging to you, the company that owns the name, and not the representative.
You know we’ve talked about the reseller structure vs. the direct sales structure. In a reseller structure, the branding can be a little bit different. You can co-brand. You might have their name on the package plus your name. Or you could sell it as a white label product and they could market it as a product provided by the regional company rather than being an American product.
Foreign Laws: Do Your Due Diligence
Steve, you’ve got some experience in dealing with problems when people sell to governments and complying with foreign laws. Why don’t you take this one?
Steve:
There are a couple of issues that always seem to come up.
Number 1, you want to have a complete understanding of the foreign laws before you even start negotiating with a foreign company if you have a product that is very important to your company. If you have a brand into which you have poured a lot of money and developed a substantial amount of goodwill, my recommendation always is to retain a reputable foreign attorney. I would go ahead and register that brand and whatever marks associated with that brand before entering into an agreement with a third party to distribute that product. And that may not always be possible depending on the IP Laws of the country or countries with which you’re dealing. But having that done beforehand I think would save a lot of headaches down the road. You may want to structure or forced to structure the deal in such that you have to create another company or the two entities may have to create a joint venture in order to sell that product under that brand name in the third country. Again, under those circumstances, you’re gonna want to go through all of the diligence issues that we talked about. And you’re going to want a JV agreement to spell out which of the two entities should combine to form the joint venture that ultimately owns the brand and the code and all of the other valuable intellectual property.
Issues When Selling to Foreign Governments
Evan:
The other thing on the slide is issues on selling to governments. National laws of every country have sort of special rules to what happens when you sell to the government or military of that country. Here in the United States, we have various standard contracting practices. In particular for software, there’s language that you need to put into the licensing agreement that if you’re gonna sell to the U.S. government and that could be true in other places, too. It sort of raises a flag in your mind if you’re doing business with the government that there may be some special issues around it.
Steve:
Your software may appear to be benign, but it may be possible to be used that is less (23:50)__ and there may be laws that you need to comply with in order to offshore that type of information.
Dispute Resolution in International Partnerships
Evan:
Steve, what about dispute resolution? What advice do you have for people on how to define the dispute resolution process?
Steve:
We’ve got two basic choices: one is the litigation and one is arbitration. And within those two broad categories, there are several subject categories or combinations of the two. Generally speaking, if you’re contracting with the U.S. Government, typically if you’re a Section 8 company, you’ll form a JV with another company to bid on a project, the government’s request for proposal is almost always gonna require some type of first informal dispute resolution and then, secondly, an arbitration provision to be in the JV agreement. We can get into the merits of arbitration vs. litigation. Chiefly, among them, arbitration is generally quicker, less expensive. It is an agreement between the partners to resolve an issue a certain way. What it’s about is allowing the companies to decide how they wanna resolve their issues. Not just substituting a lawyer or a retired judge for a currently sitting judge. If you build into the dispute resolution process an attorney’s fee provision, the will dissuade the other side from bringing in an unmeritorious lawsuit against you in order to coerce you into settling rather than incur litigation cost. And lastly, arbitration gives you the opportunity to tier your dispute resolution. And I like to build in especially with parties that may have the types of personalities that will litigate a case irrespective of whether or not it makes sense from a business perspective. Build in a 30-day really cooling off period. Require party before they can initiate a suit or before they can initiate an arbitration, in the absence of an emergent situation, to raise a dispute and then give the parties 30 days to resolve the issue before they can proceed with it further. More often than not, that will lead to resolving the issue.
Evan:
I agree with that especially when we’re talking about international deals. I think it’s particularly valuable to require that there be a high-level meeting to try to resolve it and you can write that right into the contract that there has to be a certain type of meeting or a series of meetings and a conference between people at high enough level that have the authority to resolve the issue. You get into a lot of expense when you start battling people that are across the ocean and it’s gonna be expensive for both people but more expensive for whoever has to travel or deal with the dispute at another place.
Steve:
If I could just make two of the quick points that Evan you just reminded me. You wanna try to build in a choice of form provision so that you know beforehand where you’re going to litigate, what law is going to apply, and that can be very advantageous if there is a dispute down the road.
The Benefits of International Marketing Partnerships
Kirsten:
Real quick. I have one more follow up question on Scenario 2. We talked about some of the notable complex aspects of putting together an international marketing partnership like this. I was wondering if you could, real quick, hit on some of the benefits of these types of partnerships because it can seem scary looking at all of the things you have to be certain to derate when you engage in one of these partnerships. But the alternative of going by yourself into brand new markets can be a lot less advantageous sometimes.
Evan:
I think you hit the nail on that. It’s important to know what you don’t know. The thing that you do especially in business. There’s stuff that may seem scary but they’re really not that scary. You just have to make sure that you have advisors who’ve gone through the process and can spot all these kinds of issues and make sure you address them in the discussions. It can include lawyers, business people who have experience in these. Make sure you have some advisors on your team who can help you close a good deal. The advantages are huge. Because most of us are not so cosmopolitan that we can do business in every part of the world by ourselves, we tend to need local people how businesses are done there and their connections and their credibility to open markets. If you try to do it on your own, if you don’t have local partners and local people helping you get into those markets, I think you’re just doomed to a much lower overall sales level. This kind of deal is done all the time because it really opens up opportunities to make much, much more money than you would have trying to do it on your own.
Scenario 3: The Blockchain Consortium
I think that sets us up well for the next scenario. This is definitely gonna be my favorite scenario of all of them because it is a scenario about consortia.
The Joint Venture: One Method of Structuring Blockchain Consortia
from Evan’s slideshow during the Protecting IP During Partnerships webinar
So we have a group of five entities coming together to unite under one flag to create a blockchain solution that they envision will aid an apparel transportation logistics. So they intend to create this new entity on which to build the software. So they intend to have the entity who will be the one hiring the developers and managing the launch of the blockchain solution. Can you guys tell us what does it take to form an entity like this? What are their options as far as IP ownership protection goes? How do the players interact with IP, etc.? This is a juicy one.
Evan:
This is a pretty complicated one. Not only from the legal perspective but from the business perspective. There are a lot of moving parts in this scenario that you’ve presented.
Kirsten:
It’s complicated but so common these days. So many groups of companies that are uniting together specifically on building blockchain solutions. So I hope that this could be valuable to folks that are considering engaging with one of these entities or even thinking of working in this area themselves.
Evan:
Here’s our diagram for this deal. We’ve got five companies contributing. They’re putting in some combination of money, knowledge, intellectual property, and effort. We’re gonna call this Blockchain Logistics Joint Venture, Inc. So, these five partners represented by the little building blocks are basically going to create a company, hire a bunch of developers, and build an overall solution. Now, typically, in this kind of a deal, the five companies, at least some or all of them, have some technology to contribute to this and some expertise. There’s a reason that these particular five parties got together and thought that they could build this blockchain logistics system. Some of them may have some kind of software already developed or some kind of ideas already developed or patents pending or different things that they’re bringing to the mix. Combining things among a large group like this is particularly complicated. So beyond, setting it up properly in the legal sense, this is gonna take a lot of management attention and really careful planning and handling of disputes and disagreements and immersions and people who think that they were supposed to do A and not B. It’s gonna be complicated.
Questions To Ask During Consortium Design
Some of the basics are the jurisdiction where you’re forming and where the main office is gonna be. You have to decide the ownership. What are each of the partners bringing in to the table? Do they each get 20% of the joint venture or some will equal more than the others in terms of contributions? What’s the governance structure? Who has the voting power? Is it five equal votes so whatever three of them agree to is what’s gonna happen? Do they appoint somebody to be the CEO and Manager? The whole idea of how decisions are going to be made has to be thought through. There tends to be in a blockchain and crypto community a strong dealing. There should be less rules, less authority, and more collaboration that desire has to be balanced against practicalities. You can’t make every decision by committee. People have to comfortable giving up a little bit of involvement in the day to day decision if it’s gonna be efficient. What are profit-sharing mechanisms? We make money on those, how do these get distributed? Again, is it 20% each? One of the things that happen to these deals is that what you think everybody’s going to contribute when you’re sitting around the table planning it doesn’t turn out exactly to be what everybody contributes. Somebody is going to not pull their weight. Somebody else may end up having to do a lot more than what was anticipated to do their piece of it. Somebody is going to pick the slack of the company that didn’t pull its weight. So you may have a shifting picture of how much different parties have contributed over time and you just think about how to adjust for that. Or how to credit people who have given more resources than what was originally planned so that they get something back for that. Otherwise, you’re disincentivizing people from stepping up. Certainly, dispute management. You need to figure out if there are disagreements, how do those get resolved without boiling the thing up. And ultimately, onboarding new members or removing members who aren’t productive or who don’t want to continue — there needs to be a procedure for that as well.
IP Structuring In DLT Consortia
A typical intellectual property collaboration structure for a deal like this is you have contributors — the five companies — retaining ownership of their intellectual property, which may be code, patents, inventions or know-how. Typically, whatever you’ve developed before the joint venture starts remains yours. But you’ve licensed the joint venture to use the pieces that you’re contributing. You own it but the joint venture has the right to use it. For the safety of the joint venture, that right needs to be more or less (34.48)__ as long as the joint venture doesn’t breach its deal with you. You shouldn’t be able to go take your marbles and go on and leave the joint venture without a key piece of functionality.
As the joint venture starts developing and building stuff, it’s going to own the things that it develops, the code that it writes, the inventions that its people make jointly while they’re working on the joint venture will belong to the joint venture. You have that set of IP then that’s sort of in the joint venture and they may include some discoveries of improvements to key pieces of things that the individual companies have contributed. So a lot of times there’s an arrangement where that kind of joint venture intellectual property might be licensed back to all the contributors so they can use those improvements or new ideas in their separate businesses as well as the joint venture having it. That could be with a royalty being paid to the joint venture or without a royalty depending on how people want to set it up. If one of the things the contributors are doing is providing developer hours rather than putting in a bunch of cash to higher separate developers some of the companies might be contributing our chief technology officer will work 20 hours a week on this. If that is part of the agreement, how do those developer hours get credited? How to they get equalized against what other people are doing? How is that valued as part of that company as capital contribution to the organization? Once you have the products, you’re going to have to market it. Who’s gonna market it? Is the joint venture gonna have its own marketing operation? Are the contributing companies each going to be selling the product as commission salespeople for the joint venture? This goes back to some of our other scenarios. How are various kinds of sales efforts rewarded? If one of the joint venture partners has some contacts and puts together a deal that generates 95% of the sales of the resulting product, do they get something for that? Or is everybody gonna piggyback off that and profit? Are you gonna provide technical support for the product at all levels? At the end-user level, sales engineer level or at your supporting marketing level? Is that all going to be organized by the joint venture or are there people from the individual companies that are gonna be contributing to that as well? Finally, of course, how are bug fixes handled? What happens when a piece of code that has been contributed by a partner has a problem and needs to be modified or needs to be improved? How does that get done? And what happens if that partner isn’t being responsive or isn’t fixing it right away or has sort of dwindled away and isn’t really functional anymore, is there a mechanism on getting your hand on that source code and having the joint venture fix the problem or upgrade it or do whatever needs to be done?
The Importance of Trust in Multi-Stakeholder Partnerships
Some more collaboration issues. Some of these are things that Steve pointed out when we were talking about the scenario beforehand. You wanna talk about this Steve.
Steve:
Yah. Some trust considerations. You take someone’s IP, you improve on it. You modify it to the point where you now have a new patent or new invention. All of the employees are going to need to sign very strict NDAs and they are going to have to be monitored very closely with respect to what information they come in contact with, is inevitable. This is a minefield, basically — what we’ve described here. Coz some of the things that we discussed, I think when we first talked about this — when does the work done by the new company become a derivative. I’ve mentioned anti-trust concern, particularly if you want the company to set standards that other companies the other companies will have to follow if they’re going to do business with this consortium. Well, that very definitely raises anti-trust concerns.
Questions From the Audience
Evan:
Kirsten, do you wanna open it up for questions? What’s next?
Kirsten:
Yeah. If any of the folks that still online have questions, you just type them in the chat or type your name in the chat if you want to be able to speak out the question. They’re gonna answer any question you have on anything IP-related, blockchain-related, law-related.
Okay, so we got a question.
How are IP rights and rights to improvements to IP handled when a consortium member leaves?
Participant:
This is obviously a very deep swamp. What happens here is we have five companies. Company 1 is providing some really important to the group but over-all they are a really poor performer and they’re just not making some deadlines. And we as a group decided we’re chucking Company 1 outta here. How do we make sure that we can still use Company 1’s technology given to us so far and then what do we do about improvements in the future since they’re probably not talking to us?
Evan:
Both Steve and I, I think, we’ve said that it’s really critical that the agreement makes the contribution of the technology irrevocable so that license, even if they get thrown out, you’d stay in place because otherwise, you’ve got a big hole in your product design that you may not be able to fill. What about if improvements are needed for it? One solution is to have all of the companies involved escrow their source code to the extent that they’re not just giving the source code to the consortium so that the consortium could stitch it all together and change things as needed. Then the last thing of course is that you need the license agreement to give you the right to continue to use that and to make improvements to it and whatever changes are needed.
Kirsten:
And having the agreement protect the other companies that are participating from one party just skipping out, that helps incentivize all of the parties to do a good a job and, well, not commit unless they are really, really committed. Because no one wants to have their IP to be continued being used by a party they are no longer affiliated with.
Steve:
And well, will Company 1 continue to get any royalty? What if Company 1 is not a bad partner but rather Companies 2–5 are the bad partners and they decide they are just going to hunt Company 1? There has to be some protection against that type of … What invariably happens in these LLCs is they either go along well if it’s making money. The jungle is a perfectly nice place when there’s enough food for the animals to eat but as soon as that changes, so too does everybody’s attitude towards each other. And there needs to be protection for the group from Company 1 but there also needs protection for Company 1 from the group. Again, that’s another thing you’re gonna build early on.
How do you value IP?
Evan:
I see another question. How do you value IP? Boy, I wish I knew the answer to that because there are a lot of people that put out a lot of effort and get paid a lot of money into trying to value intellectual property. It’s more of an art than a science truthfully. Ultimately, the value of IP is what you can get for it in an arm’s length negotiation. And it’s kind of a simplistic answer and I don’t mean it to be. But all of the mechanisms that people use to try to put a valuation on intellectual property are basically ways of trying to get that idea of how much profit can this Intellectual Property generate if we put this patented idea into a product and that product sells 30% better than the competitor because it has that patented feature, you do all kinds of accounting and spreadsheets and figure out how much is that worth in dollars. How much incremental revenue is that patent generating in this application? And software, source code, same issues really with an application. What are the prospective sales of it? There are several common ways that accountants value businesses in the sense that if you’re looking at something as being a product that you’re gonna sell and you’re gonna make a certain amount of money when you sell a certain amount of them over time, that’s basically valuing the business. So you’re valuing a revenue stream and you can do that by a method of multiples, annual profit that is appropriate to the industry, there’s a net present value of the income stream. It’s all art in an effort to get to that elusive question of how much would somebody really pay for this.
Participant:
We are now in discussions with an organization that has expressed an interest in potentially acquiring some of our intellectual property so we were talking about the valuation of our IP but that was spot on. That’s the verification that I needed for some of the stuff we’re working on. Thank you.
Steve:
Whatever they say it’s worth, you say it’s worth more.
Participant:
Good talk. You guys shared a lot of interesting stuff. I’m looking forward to perusing the presentation at my leisure and kinda digest a little bit more deeply.
Steve:
Any one of you can get in touch with either of us or with Kirsten offline as well if you have any questions.
Evan:
We’re easy to find. Steve and I are both always willing to chat with people no charge and find out how we can help you if we can.
Kirsten:
I’m very glad this has been valuable to you guys. And once again thank you so much, Evan. Thank you, Steve. I was so excited about this discussion because I nerd out Intellectual Property and it’s not often that you have fellow people to just endlessly talk about Intellectual Property with. So I very much value your time and I think everyone did as well.
Evan:
Kirsten, thank you for putting it together. You’re probably one of the relatively few people in the world that enjoy what I do.
Steve:
Thank you very much. And thank all of you for participating.
Kirsten:
Well, we’re gonna wrap up here. Once again, thank you everyone for attending and I’ll be touching base with the e-mails soon. Bye.
