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Stuart Garfield
Wednesday, October 7, 2009
Failed takeoff leaves entrepreneurs with orphaned IP
By Jill Gambon, Special to Mass High Tech
Ig Nobel Prizes 2009 award winners
How is the economic crisis affecting tech companies?
Forming and running a startup that offered web-based property management services, Jeff Takle had a lengthy to-do list: Create a product that serves the needs of rental property owners, market the service effectively, and craft deals with strategic partners, among other tasks. What he didn’t think about was a long-term strategy for the company’s intellectual property if the business didn’t take off.
Takle, who founded Rentingyourhome.com in 2005 but then shuttered the Boston-based firm this past June, said that in hindsight, he wished he had taken a different software development approach, one that would have allowed him to sell off components of the custom-developed code to companies that only needed specific applications that his firm offered.
“I would have tried to build the software a lot more modularly so I could shave off pieces,” said Takle. “I was thinking the prime value of the company was in the customer base, not the (software) code. This isn’t the ideal exit strategy.”
Takle is like many entrepreneurs who are faced with the challenge of divesting IP assets, including trademarks, patents, domain names and trade secrets when a company shuts down. The process, IP lawyers and entrepreneurs agree, can be complicated and fraught with uncertainty, because, unlike real estate or office furniture, IP often is difficult to put a price on. “IP is not like tangible assets with a recognized value,” said Vernon Maine, an IP attorney in Nashua, N.H.
Strategies for selling IP vary, depending largely on the company’s business model and the tax consequences of a sale, said Maine. Some companies try to sell to competitors, others to IP aggregators, or firms that scoop up IP and license it or resell it, and some sell to patent trolls — the firms that buy up patents so they can enforce them. To help find buyers, companies often hire IP brokers or consultants who are familiar with the market. In addition to private sales, there are live auctions in which patents and other forms of IP are sold. Some firms create separate holding companies that license the IP to generate revenue.
One complicating factor in the dispensing of IP is that some companies don’t have a handle on what they own.
“A big problem with IP is out of sight, out of mind,” said Erik J. Heels, a patent and trademark attorney and founder of Clock Tower Law Group LLC in Maynard. “People often don’t think about IP until an event like a bankruptcy or preparing for a possible acquisition. It’s a common problem for companies large and small,” he said. Better management of IP portfolios is key to getting the best return, he advised. “It’s important for companies at all stages to audit their IP and have a good idea of what they own,” Heel said.
Like any business decision, timing is a factor when putting IP assets on the market. Typically, sales of patents and other IP take three to six months, or longer if there are problems, according to Daniel Sklar, senior counsel with Nixon Peabody LLP’s bankruptcy and financial restructuring practice in Manchester, N.H.
In a down market, some businesses defer selling and wait for the market to rebound or for buyers to emerge. These companies will often “mothball” operations and spend just enough to keep up with fees for patents, trademarks and other IP until they are ready to sell, according to Jonathan Gworek, an attorney with Morse Barnes-Brown & Pendleton in Waltham, who represents emerging technology companies.
With so many startups shuttering in this battered economy, the amount of IP on the selling block has increased in the past year, making it a buyer’s market, several IP experts said. “There are a lot of bottom feeders acquiring as much IP as they can. They’re looking to pick up IP dirt cheap,” said Joseph Cote, managing director of Cote Associates, an IP sales and strategy firm in Charlestown. Firms selling their IP need to figure out how quickly they need the cash from a sale — which can impact their options, Cote added.
That was among the considerations Gregg Favalora, the founder of Actuality Medical, had to weigh when his Arlington firm closed its doors in April after its funding dried up. Actuality, which was developing 3-D visualization software for medical applications and had raised $16.5 million from investors over 12 years, sold off its office and high-end electronics equipment quickly on eBay and through Clean Out Your Office, a Concord firm. But selling Actuality’s IP has been a lengthier and more involved process.
Favalora is now shopping the company’s IP portfolio, which includes 19 patents with several more pending. After talking with IP brokers and others, he was advised not to rush into the market. However, maintaining the firm’s IP portfolio costs money — not only patent fees, but also taxes, server maintenance, phones and utilities. “That’s something that an exit CEO has to really think hard about,” Favalora said.
Todd Burger, CEO of Chameleon Network, a Lexington-based company that developed software for mobile transactions, concurs. Chameleon shut down operations in 2006 and has been looking for a buyer for its IP portfolio. According to Burger, Chameleon’s software was ahead of the market, so the company has benefited from holding on to its patents as the market has evolved. Burger suggested that startups faced with closing should weigh the benefits of shutting down immediately to preserve the funds needed to protect their IP while they look for a suitable buyer against pushing ahead with development, burning through cash and then having to sell assets quickly.
There are steps businesses can take to help maximize the value of their IP portfolios before they get to the point where they are looking to sell off their assets. In addition to inventorying all IP holdings, the company should map its IP strategy to its overarching business plan, said James Malackowski, CEO of Ocean Tomo LLC, an IP merchant bank based in Chicago, which launched live IP auctions in 2006. It’s crucial to know whether anyone is infringing on the IP, which could increase its value, or if competitors might want the IP, he said. “You need to look at what IP you own and how you are using that in your business,” he said. “And you need to do an analysis of the competitive landscape.”
That kind of intelligence can help companies understand what their IP portfolios will fetch in a sale. “There are more IP assets changing hands. Opportunities present themselves in a market like this, and you need to be ready to move,” said John Lanza, chair of the IP practice at Choate Hall & Stewart LLP in Boston.
Where the assets go
Some recent examples of asset deals:
Just two months after the company cut its staff levels by more than 50 percent, data-warehousing appliance company Dataupia Inc. is seeking to sell its assets, according to published reports.
Blood-technology developer Biopure Corp. completed its $4.05 million asset auction to OPK Biotech LLC. In addition to buying substantially all of Biopure’s assets, OPK also agreed to acquire Biopure’s 50 percent stake in a partnership that owns the company’s headquarters and some laboratory space. Biopure does not expect its stockholders to receive “any substantial distributions” from the OPK deals, the company said in a regulatory filing. Biopure filed for bankruptcy protection earlier this year.
Vectrix Corp., a Middletown, R.I.-based maker of an all-electric, zero-emissions scooter, filed for Chapter 11 bankruptcy protection, and announced plans to sell most of its assets to New Vectrix LLC for $5.1 million, pending court approval.
Jill Gambon is a freelance writer in West Newbury
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