This post is sponsored by Benesch.
Valuation of a start-up is important for a variety of reasons. Obtaining capital, developing partnerships and preparing for an eventual exit strategy are just a few. Valuation is not an exact science but rather the result of judgments relating to the business, and those judgments are based on a variety of considerations. But one thing is certain: a company getting started can greatly enhance its valuation by having or developing a rock-solid intellectual property story. Intangible property, in the form of patented technology, trade secrets, trademarks and designs, and copyrights, often represents the most important asset class on a company’s balance sheet. And in the case of a technology start-up, IP is of paramount importance. Because IP is so important, a start-up company needs to devote significant time and resources to developing its IP story.
Part of that story involves establishing ownership and control over the IP relied upon by the start-up. The value of documented title to inventions and other IP cannot be overstated. Title can be obtained one of two ways. The company can either create the IP, or it can buy or license it. If it creates the IP, it should have solid employment or consulting agreements in place that ensure that the company, and not the creator, will own the IP created. Similarly, if not created by the company, a valid assignment or license is necessary to ensure that the company actually has the rights it needs.
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Another part of a good IP story is having control over disclosure and exploitation of inventions and other IP, and the same agreements discussed above can be used to restrict such disclosure and exploitation to those activities that further the interests of the start-up company. Having these agreements in place when the company is trying to raise capital is expected by sophisticated investors, who will almost certainly perform diligence before making a substantial investment in the company. If the proper agreements are not in place, the company’s valuation will be diminished and perhaps even discourage an investment.
With respect to technology start-ups, strong patent rights are often essential to a robust valuation. Many leaders of start-ups do not realize the fact that when it comes to patents, like many things in life, you get what you pay for. A weak patent—for example, one that is poorly written or drafted with narrow claims—does not contribute materially to the value of a company, and it may even detract from such value.
The quality of a patent is measured by its ability to exclude others from competing and by its ability to stand up to a validity challenge in litigation. With patents, the name of the game is the “claim.” How claims are drafted delimits a company’s ability to exclude others from commercializing an invention. Claims are therefore valuable only when they are well-drafted and carefully vetted before submission to the patent office. All too often, companies buy patent services based on price rather than concerns for quality, competency and experience. This approach is penny wise and pound foolish. Retaining competent and sophisticated patent counsel with experience in enforcing patent rights is extremely important to achieving real value.
Building a patent portfolio can further bolster a company’s IP story. The theory is strength in numbers—that multiple patents block or discourage competition more easily than a single patent does. Investors tend to look at it that way, too. A patent portfolio also hinders competitors’ design around efforts and makes them more costly. Follow-on patents can also be used to protect improvements to base technology and plug holes in earlier patents.
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At the end of the day, taking the time and devoting the resources to develop a good IP story is essential to the success and strong valuation of a start-up company.
