IP as an Exit

Selling or licensing IP, especially patents can provide extra cash for a company or act as an exit for investors, but it needs to be executed well, or it will destroy value. Based on real examples that I have encountered, I will highlight some of the process and mistakes companies make when selling or licensing IP.

Take for example a widget company that has faced significant delays with the development of its new product. Over the years it has amassed a large portfolio of patents that cover several key technology areas. However, the company is running out of cash and has difficulty attracting new customers due to the uncertainty around the release.

The company needs cash, but existing investors are tapped out and it would be a serious down round. To raise capital, the company’s board decides to explore different exit options ranging from the sale of the entire company to monetizing the IP through a sale or licensing of the patents. The board believes strongly that its patents are infringed because it has been operating for several years in a competitive and crowded market.

Selling patents, particularly those that are unused appears attractive to the company as it can generate some cash in the short term and reduce its future expenses due to maintenance fees. Licensing also looks like an attractive option for the company to generate additional income. The board believes that licensing the technology could be an opportunity for new development and business relationships that would also bring in some cash.  

Unfortunately, the board is unsure how to approach selling or licensing the patent portfolio and decides to hire a broker to handle the process. Typically, a broker charges an upfront fee and a percentage of the sale price for work related to the transaction; the fees charged by a good broker are well justified and earned. Even if the result of their process is to say, “we can’t sell your portfolio”. The board however is sensitive to spending money and decides to go with a broker that will not charge an upfront fee and has a lower commission. Valuation multiples are currently attractive, so the board decides to also retain an investment banker to evaluate selling the company. The mandates of the patent broker and investment banker are separate, and both are instructed to act opportunistically.

 Several months pass and valuation multiples for the company decline due an economic downturn and the company becomes more desperate for cash. After some marketing efforts, the patent broker presents a modest offer for the sale and license back of the entire patent portfolio to the company; believing that the cash provided from the sale is the best option for the company they accept.  

After several more months and some restructuring, the company is more stable and decides to pivot its offerings to respond to changes in the market. However, the pivot is complicated by some of the clauses in the licensing agreement that reduce the company’s ability to use the technology outside of existing products. A board meeting is convened to discuss the issue where one of the members of the board reads an article and notices that the company they sold their patents to had just filed a lawsuit against a major tech company with its old patents.  

As more time passes, the board believes that the improved stability of the company and economy have improved the value of the company. Another attempt is made to sell the company; however, after completing diligence, few buyers are interested in the company as its technology development is severely limited due to the encumbrances placed on it from the license. Although this story is somewhat fictionalized, it contains elements that I have seen happen several times. When looking at selling or licensing a portfolio of patents companies need to consider the following:

• Do we have a cohesive business and IP strategy that will maximize value?
  • In this case, the widget company did not. The board pursued two separate mandates with the investment banker and patent broker without considering the implications.
  • Although the cash from the sale of the patent portfolio allowed the company to continue operating in the short term, the long-term prospects vague.
  • Limitations from the licensing agreement have complicated the company’s ability to pivot and reduced its chances of being acquired. 
• Do we have the right partner?
  • In this case, the board did not know what questions to ask and did not find a good partner to help monetize its IP.
  • The selected broker did not perform good diligence, missing a key infringement opportunity that could have led to a higher offer or direct licensing agreement.

Arkworth Inc. can help answer these questions and more by conducting reviews of your IP portfolio and strategy, valuing your IP, and working with you through special situations.