Part 4: Matching your IP strategy to your commercial plan – exit through acquisition

In any business, the spend on intellectual property (IP) legal advice needs to be commensurate with the value and importance of IP to the business. There is no “one size fits all” model. In the first three articles of this series, we provided an overview of IP strategy considerations, and then applied them to a company that produces and sells its own products, and a company that licenses its technology to others around the world.

In this fourth article, we explore how those practical considerations might be applied in the case of a start-up company that is trying to make itself attractive for take-over.

For a more detailed discussion specific to you and your IP, please do reach out to us or one of our Abel + Imray colleagues.

Flexibility for the future

Once again, the pros and cons of registered and unregistered IP rights come into focus. Generally speaking, investors will be looking for some registered IP rights. However, the filing of patent applications will inevitably lead to the publication of some technical information. Therefore, published patent application documents filled with technical detail may discourage a potential acquirer from investing if the geographic coverage of patent rights is limited.

An early-stage company looking to be acquired can thus benefit from keeping its patenting options open for as long as possible. This may include, for example, filing International patent applications. International patent applications effectively defer having to choose the countries in which the company wishes to secure patent protection.

It is likely that the acquirer will have a larger IP budget than the original business. It can therefore be useful to keep as many options open as possible. For example delaying the filing of patent applications may leave the acquirer with more choice over geographical coverage, and keeping applications pending leaves open the option for divisional applications that can be tailored to better suit the needs of the acquirer. Nevertheless, there is a tension between this desire to defer filing of patent applications with the need for the start-up business to promote its work. Most importantly, any patent application for an invention should be filed before there is a non-confidential disclosure of the invention.

Preparing for negotiation

Acquisition negotiations can require the details of know-how to be shared. While non-disclosure agreements are intended to protect and preserve confidentiality, they can be difficult to enforce if an acquisition negotiation breaks down. Having patent applications already on file before negotiations start can help to strengthen the position of the company, and also make it clearer who invented what (and when) prior to such discussions.

Take for example a start-up that has come up with a new biodegradable polymer that utilises a novel monomer linker inspired by a biological system. It may be that the start-up has achieved proof of concept for one particular polymer, but further development is required to get the right balance between resilience in normal use and biodegradability during disposal. An acquirer may ultimately conclude that such a polymer is not commercially viable, and not attractive for its business. However, it may be that the potential acquirer realises that the concept could be readily applied to another polymer system that hasn’t been studied by the start-up. The start-up could then be left in a difficult position if they have no patent protection for the wider applications of their invention. A start-up armed with pending or granted patent rights may have a stronger hand in negotiations, even if the acquirer is less interested in the proof-of-concept prototypes already under development.

Becoming an attractive proposition

Assuming that the business has some idea of potential acquirers, it can be useful to research how and where they protect their IP. The IP portfolio is likely to be a particularly important asset of the business, and it may be more attractive for acquisition if it complements an existing portfolio. For example, if a potential acquirer always files an application in Brazil, it may be useful to file an application in Brazil, or at least keep open the option to do so.

If you have potential acquirers in mind, you may wish to review their portfolios to get some idea of which companies would be the best fit to make use of your technology. One company may find that they are less interested in working with you if it turns out that one of their major competitors has third party rights that would block use of your products. On the other hand, a potential acquirer without any existing patents close to your technology may find attractive the opportunity of obtaining rights that it can use to negotiate with its competitors.

Striking a balance on freedom to operate

Any potential investor is likely to ask whether you know of any third party rights that could be used to stop exploitation of your technology. However, technology developed by start-ups often requires extensive development in order to become commercial, and therefore the commercial product or process may be very different from the product or process first developed. Therefore, it may not be appropriate to perform extensive freedom to operate searching based on early iterations of a technology.

Putting policy into practice

In the final article of this series, we will look at how an IP policy can be used to help businesses make IP decisions efficiently and consistently.

We are a European firm and assist our clients to protect their IP rights in the UK, Europe and worldwide from our offices in the UK and The Netherlands and through our international network of trusted local attorneys. Get in touch if you would like to discuss your innovations and brand protection further.

This article is part of a series, read more here:

Part 1: Matching your IP strategy to your commercial plan – making the most of your resources

Part 2: Matching your IP strategy to your commercial plan – ‘in-house commercialisation’

Part 3: Matching your IP strategy to your commercial plan – ‘technology licensing’

Part 5: Matching your IP strategy to your commercial plan – efficient decision making