When it comes to M&A, private equity, large public stock or other investments in an IP-dependent company, of which there are growing number, fundamental questions are often often overlooked because they are not readily seen. Timely due diligence can go a long way to managing risk.
Before signing on the dotted line, says UK IP law firm and consultancy, Potter Clarkson, investors should understand the hidden IP risks – the unseen dark mass below the iceberg on the surface.
For example, are you sure the company in question actually owns the patents, trademarks and trade secrets and have the necessary strategy in place to use them to support its business?
“To do that,” says Potter Clarkson, “investors need an approach that looks beyond a list of IP assets and takes into consideration the company’s IP strategy, which is rarely an explicit part of the stated business plan.” (And why not with the value of IP assets often comprising the majority of market value.)
Key questions investors ought to ask but often do not:
1. DO THEY HAVE THE IP STRATEGY TO DELIVER THE BUSINESS PLAN?
It demonstrates that the company understands its commercial objectives and responsibilities, including how their investment will be safeguarded during future funding rounds or at exit.
2. DO THEY HAVE THE REQUIRED IP RIGHTS TO SUPPORT THEIR BUSINESS PLAN?
An investor needs more than a long list of IP rights owned by the business. An effective due diligence process will map these rights against the products and commercial opportunities described in the business plan to determine if they have the necessary rights to support the longer term objectives.
“Investors need an approach that looks beyond a list of IP assets and takes into consideration the company’s IP strategy, which is rarely an explicit part of the stated business plan.”
3. WHO OWNS THE IP?
Innovation, especially in startups, can occur before commercial relationships and business processes have been formally defined, which can make determining IP ownership less clear-cut.
4. HOW DO THEY MANAGE THEIR IP?
The way an organisation manages its IP can provide an indication of their commercial ambition and how serious they are about maximising the value of their innovations. It is always encouraging to see IP being discussed at board level, as well as a disciplined approach to processes such as innovation capture and evidence of an internal IP register.
5. HOW DO THEY PLAN TO DEVELOP AND MARKET THE TECHNOLOGY?
It is important to understand whether such collaborations have been factored into the IP strategy and, if they haven’t, how far such relationships have progressed. In certain circumstances, a company may have inadvertently weakened their IP position.
6. WHAT IS THEIR ATTITUDE TO RISK?
How thoroughly has the company has explored its freedom to operate (FTO) position and what steps they have taken to mitigate for any risks that may have been identified? FTO is not an issue that can be left until it is required.
It’s the mass below the proverbial tip of an iceberg that you don’t see you need to worry about; not the part you can.
Image source: PotterClarkson
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