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Telephone: +44 (0)20 3375 7000 Email: enquiries@farrer.co.uk Web: www.farrer.co.uk

Dealing with IP as an asset: 6 key steps for early-
stage businesses and SMEs
David Copping
Dealing with intellectual property (IP) in a transactional context is a hot
topic. Kelvin King's and Martin Brassell's excellent report for the UK Intellectual
Property Office highlighted current market failures which prevent UK and
European businesses effectively "Banking on IP". These failures relate in part to
the relative complexity of IP as an asset class, and the diversity of individual
intangible rights which exist under the general "IP rights" banner (more on this
below). Based on our experience, a large proportion of growing businesses and
SMEs are still failing to tackle this complexity and properly package their IP. This
has a direct negative effect on their bottom line, in terms of exit valuations,
licensing revenue, or borrowing prospects.
We feel that both the entrepreneurial and investor/lender communities still have
much to learn when it comes to dealing with IP as an asset. Following 6 simple
steps can, we think, help to give your business a competitive edge.
1. Get informed - understanding IP Rights
Every entrepreneur or technologist (or investor/lender operating in such spheres) should have a basic understanding
of the different kinds of IP right, and the core features of each. Even a very rudimentary understanding along the lines
of the following can help:
IP Right Registration
required?
Protects (in broad
terms)
Provides a Monopoly? Value independent
of first owner?
Copyright No, arises
automatically
Artistic and literary
works, including software
No prevents copying Yes
Patents Yes Inventions with potential
for industrial application
Yes, in registered
territory
Yes
Trade Marks Not necessarily, but
registration is useful
and helps
enforcement
Trading names, logos Yes, (where registered)
in registered
goods/services and
territory
Potentially
Design Rights Both registered and
unregistered right
Aesthetic appearance of
products
Registered yes
Unregistered - no
Yes
Confidential
information/
trade secrets
No

Secret information or
data
No prevents
unauthorised use or
disclosure
Only where lawfully
obtained and
confidentiality
preserved
Database right No Investment in obtaining
and presenting data (in
the form of a database)
No prevents
unauthorised extraction
and reutilisation
Potentially,
depending on nature
of data and (if
personal) consents
Without a basic understanding of IP rights there is a risk that IP will remain uncaptured, that rights to protect will be
lost, or exploitation opportunities missed. Good, basic information is freely available, for example on the
UK Intellectual Property Office's website. Free workshops are available from public institutions such as the British
Library's Business & IP Centre. You should also speak to your legal adviser to see what free training they offer in
relation to IP rights and ask to be included on relevant mailing/invite lists (or contact us at Farrer & Co we'd be
happy to help).
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2. Make sure that you own it
One of the most common failures we see in fast growing technology or IP-based businesses is a failure to clearly
secure ownership of core IP, particularly where it has (as is often the case) been developed by individuals who, one
way or another, are not employees.
A (very) basic rule of thumb is that IP generated by employees in the course of their employment is owned by the
employer, but that IP generated by third party contractors or collaborators (which could include freelancers, software
developers, academics assisting with proof of concept testing, or friends mucking-in) will remain with those third
parties. Where third parties are involved during the early stages of a business venture, suitable IP assignments
should be entered into (normally in the contract covering the relevant work).
When attempting to sell your business, secure your first major strategic licensing deal or raise finance, problems
around ownership are likely to be spotted during routine due diligence. This can impact on valuation, lead to retention
of sale proceeds or potentially be deal breakers. Plus, as your business grows, it will become much more expensive
to fix any gaps in your chain of title to the relevant IP, particularly if the third party IP owner is unscrupulous or
disgruntled; hence the need to secure ownership at an early stage.
3. Register what you can (within reason)
According to the "Banking on IP" report
"based on balance sheet analysis, over 9% of [UK] small businesses have patents and trade marks, rising to 14.5% of
medium sized companies and just under 17% of large companies".
As mentioned above, certain kinds of IP can be registered, potentially providing monopoly protection in the relevant
field (eg in the case of patents or registered trade marks). Registrations provide a competitive advantage and allow a
certain degree of market freedom within the scope of the protected rights. Investors and lenders will also often make
assumptions based on the strength of a company's registered IP portfolio (see step 6 below), particularly where
businesses owning registered IP are in the minority.
But a balance must be struck. For every business, the cost of filings for registration needs to be weighed against the
commercial benefits: international filings may need to be staggered to fit with cash flow modelling and necessity.
Registering everything you possibly can (particularly in relation to trade marks and endless domain name variants) is
unlikely to be a wise use of funds.
4. Check your freedom to operate
Many early-stage businesses' and SMEs' primary focus is on their internal IP position (ownership and registration).
They forget to look to the market and world at large to assess whether or not their business infringes the rights of
others. This is particularly a risk in the case of the monopoly style rights (patents, trade marks) which can be infringed
entirely innocently and inadvertently (given that there is no requirement for copying).
Freedom to operate (FTO) issues are a hot topic currently, particularly in relation to software patents, patent trolls
generally and (in the life science sphere) the previous grant of patents for naturally occurring phenomena such as
gene sequences. Patent searching is a complex undertaking and requires specialist assistance which comes at a
price, but for most science-based businesses, or information technology businesses looking to enter the US market, it
is a necessity which must feature in any overall business plan or strategy. Increasingly the cost and complexity of
these searches (and the existence of earlier, vaguely defined patents) is seen as a drag on growth and innovation and
certain steps are being taken by legislators to address such concerns. But for now it remains a big and difficult issue.
For trade marks, the searching is rather more straightforward, with most national and international registers being
accessible and easily searchable and the existence of prior unregistered rights normally being fairly easy to test via
the wonders of a Google search.
Even if a business runs no FTO searches and simply "hopes for the best", adopting a head-in-sand style approach will
not pay off in the long run as any well advised investor or lender will run their own searches before deciding whether
or not to invest in the business.
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5. Avoid inadvertent loss or leakage
Many businesses we assess when performing legal due diligence, have done the initial hard work in terms of
capturing and registering IP, but then do something which potentially loses or devalues the IP (normally in the rush to
grow the business as fast as possible). This could be by:
disclosing a potential patentable invention in a public setting (jeopardising the scope for patent protection);
signing an NDA or services/development agreement with a big industrial partner which includes assignments or
licences of IP (or a vague right for the partner to take the benefit of any derivative works);
(in the case of software development) using open source code licensed on restrictive/reciprocal licence terms
(such as the Free Software Foundation's "General Public Licence" (GPL));
granting exclusive licences without adequate performance obligations on the licensee's part, or clear rights to
terminate where minimum sales/royalty targets are not met;
not checking what research grants terms say around IP ownership; or
(increasingly) building a business on a third party platform (Facebook, say) and not checking the platform policies
around ownership of data or IP.
Such problems can normally be avoided by soliciting a quick legal review asking for a review of business-
critical/showstopper risks only. Publishing and policing an internal IP policy will also help to reduce IP loss or leakage
and is likely to represent the gold standard, in terms of IP management within an organisation.
6. Record and tell the story
IP rights represent a complex asset class. Anything you can do, therefore, to:
(a) keep a full and clear register of all IP which you own and which you feel is material to your business; and
(b) explain why that IP is valuable (and potentially has a value independent from your/the owning business's
involvement)
will set you apart from the large majority of rival investment targets. This step is incredibly easy compared to the other
steps mentioned above, but rarely executed.
To stress why this is important on a purely practical level: acquirers or investors commission detailed legal due
diligence on targets but in practice their focus will be drawn to the executive summary of the DD report, or even their
lawyer's verbal summary. A statement to the effect that a target's IP position is robust and well organised can (rightly
or wrongly) lead to extrapolations regarding the business as a whole and the opposite is also true, where the target's
IP position is weak and disjointed.
Any IP report/register you produce can also potentially if financially proportionate be enhanced by an IP valuation
specialist, who may be able to enhance your IP "story" with an attractive, market-tested valuation.
Summary
The 6 simple steps mentioned above are all fairly obvious. Nevertheless, in practice they are rarely followed and we
see a huge amount of value lost and angst created as a result. Hopefully you will find these pointers useful, in terms
of adding value and avoiding future angst, when dealing with your prize intellectual property assets.
If you require further information on anything covered in this briefing please contact David Copping
(david.copping@farrer.co.uk; 020 3375 7485) or your usual contact at the firm on 020 3375 7000. Further
information can also be found on the Intellectual Property page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific
circumstances. Farrer & Co LLP, April 2014