IP Ownership as Leverage for Founder Equity Negotiations (ceoworld.biz)

IP Ownership as Leverage for Founder Equity Negotiations


There is much truth to the saying, Do you want to be king Or do you want to be rich

Translating that adage into simple math Do you want to own 100 of a company worth 100,000 or 10 of a company worth 10,000,000 Certainly, if this example holds true, that if for you, the taking in of outside investor funding means your percentage goes from 100 to 10 but the value of your equity goes from 100,000 to 1,000,000, then dollarwise, its a no brainer.

The rub comes for founders, when taking in funding does not translate into significant growth in value. What if the company grows from 100,000 to 10,000,000 and your percentage declines to 1 or even less so that not only the value you actually see is not much more than you started with, but you also suffer loss of control. That can and has happened to owners when terms for vesting, revesting, participating preferred, investor antidilution and other investorfriendly terms work to take over the company to the disadvantage of the founder.

Cliff vesting or revesting is another great danger.

In one of my representations, most of my client founders revesting was predicated on a change of control and prior to that change of control, she was terminated and thus lost most of her equity.

Leveraging IP in Strategic Transactions

In the case of that particular client, company intellectual property offered her a potential selfhelp remedy and chance to leverage her awful contract position.

As with so many companies, the intellectual property is the life blood, the guts of the company. Without the IP, the company is a shell. If there is a serious challenge to ownership of the company IP, it can become toxic to new investors, for an IPO or to a potential acquirer.

Where my client was being terminated so she could not revest with the change of control, the acquisition, the issues we were able to raise over her potential claims to the companys intellectual property made a huge difference. These claims unlike everything else got the CEO and Boards attention, so that her issues were at last addressed.

Where IP Ownership Issues Can Arise

For the Founder CEO or Clevel executive to be able to leverage intellectual property ownership in equity negotiations with the company, there often needs to be an ownership issue.

Ownership issues often revolve around transfer of intellectual property. When companies seek investment, investor counsel normally pays close attention to instruments of assignment of intellectual property to the company.

However, if those documents have not been fully executed, it might provide an opening.

On other occasions, the company makes an acquisition. In the acquisition, transfer of IP might not be fully transferred.

Finally, the role of the executive can make a difference. Generally, intellectual property created by a fulltime employee is owned by the employer. But it is much less clear for an independent contractor. So, if a company acquired your startup, and the acquiror continued your service as a contractor, perhaps to save themselves the costs of employee benefits, that might work in your favor, allowing you a greater claim to your intellectual property.

Issues arising from Types of IP

IP assets include copyrights, trademarks, patents, and trade secrets.


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