10 Most Common Mistakes How to Dilute the Value of Your Technology Company or a Strategic Project?

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1 10 Most Common Mistakes How to Dilute the Value of Your Technology Company or a Strategic Project? Mika J. Lehtimäki ja Jan Lindberg 12 November

2 Revenue TRUST. INTRODUCTION Pilots & Marketing Asset Finance Technology Development Technology R&D Government Business Angels Seed capital Some VCs Bank debt Manufacturing Scale-up VCs Strategic alliances M&A Private Equity Bank debt Mezzanine Public debt issuance IPOs Bank debt Secondary offerings Public takeovers Time Venture Capital Development Capital Project devel., operations, construction

3 1. BAD STRATEGY OR NO STATEGY Patents do not create automatic exclusivity or freedom to operate - only a right to sue Patents can have a credibility value as such, but financial value only if supported by an appropriate strategy You need to know what you can do with your IP and how you either attack others or defend yourself Clear choices need to be made, enter the IP licensing business or simply use the IP to protect your own products Good IP strategy Understands the true commercial objectives of the strategy Appreciates the existing limitations and practical constraints Is supported by practical processes and practices Is actually implemented and followed

4 2. NO BUSINESS TARGETS Your strategy and plan must reflect the practices of your specific field of business Level of IP protection generally The level of hostility of your industry and main competitors Valuation of IP generally Lifespan of any specific technology Is your market segment accepting IP-based business models?

5 3. EXCLUSIVITIES Licensing Survey (* : when deals go bad, with the benefit of hindsight, could this have been avoided by structuring any of the following contract characterstics differently? 1. Technical milestones 54 % 2. Business milestones 52 % 3. Field of use retrictions 41 % 4. Degree of exclusivity 35 % 5. Payment structures (upfront vs. royalty) 34 % 6. Payment amounts 31 % 7. Terms of use 26 % 8. Duration of agreement 22 % 9. Grant-back provisions 19 % 10. MFN provisions 5 % *Licensing Executives Society (LES)

6 4. CONTAMINATING PUBLIC DOMAIN Freedom to operate may be limited also contractually: Contractual limitation, e.g., in the NDA Also note patent mining clauses Information belonging to public domain Contractual limitation restricting freedom to operate

7 5. STEPPING INTO A NON-ASSERTION MINEFIELD License - a right to use Non assertion - promise not to claim against the use Non assertion effectively a license! Non-assertion may accidentally create a portfolio license to the current and future IPR portfolio, without limitations How widely will the non-assertion be applied Can create a viral effect to the IP portfolio of a possible buyer Can extend to the customers of the Parties, which may effectively dilute the value of the IP They sound appealing and politically correct but cause mainly harm!

8 6. DILUTION BY FOUNDRY AGREEMENTS? Foundry agreement what does it mean? Cyrix Corp v. Intel Corp. & Intel Corp. v. ULSI Sys. Tech.: Intel entered into a cross-licensing deal by which each party received a license to any products. Afterwards, HP agreed to make microprocessors to ULSI and Cyrix (Intel s main competitors). Intel sued ULSi and Cyrix for patent infringement, but they claimed that their products were licensed (as they were manufactured by HP). The court agreed that Intel s patent rights were exhausted. Consequences for Intel s: Additional royalties? Defensive use and settlements?

9 TOOLS FOR COLLABORATION Collaboration model Transaction growth Organic growth Non-equity Contractual JV Other licensinc agreement, collaboration, distribution network etc. Equity Minority investment Joint Venture Majority investment (like 2/3) Share Purchase / Business Purchase Branch office Subsidiary (e.g. new production facility) Commitment Integration Control


11 8. FAULTS IN IP ALLOCATION: EXAMPLE FROM JOINT VENTURE Foreground IP Background IP JV Background IP Company A Derivative Foreground IP JV-Agreement Company B

12 9. VALUE DILUTION BY FUNDING Selection of right funding tools may have significant effect on your IP portfolio s value Tekes: Mikäli rahoituksen saaja haluaa siirtää rahoituspäätöksen kolmannelle osapuolelle projektin aikana, on siihen saatava Tekesin kirjallinen suostumus. Rahoituksen saajan on ilmoitettava Tekesille etukäteen, mikäli se projektin aikana, viiden vuoden kuluessa rahoituksen viimeisen erän maksamisesta tai ennen kuin laina korkoineen on kokonaisuudessaan maksettu takaisin; 1. myy, panttaa tai muulla tavoin luovuttaa projektin tuloksena syntyneen liiketoiminnan tai osan siitä; 2. myy, panttaa tai muulla tavoin luovuttaa projektin tuloksena syntyneitä immateriaali- tai muita oikeuksia; 3. siirtää liiketoimintaansa ulkomaille tai 4. toteuttaa muita merkittäviä liiketoimintamuutoksia tai yritysjärjestelyjä (kuten sulautuminen, jakautuminen, merkittävä omistusjärjestely sekä merkittävät henkilöstön vähennykset, jotka kohdistuvat Tekesin rahoittamaan toimintaan). Kun rahoitus on myönnetty avustuksena, edellä mainitut järjestelyt edellyttävät Tekesin etu-käteistä suostumusta, jos järjestely toteutetaan Euroopan yhteismarkkinoiden alueen ulkopuolella tai jos järjestely vaarantaa projektin tavoiteltavien vaikutusten toteutumisen. Kun rahoitus on myönnetty lainana, edellä mainitut järjestelyt edellyttävät aina Tekesin etukäteistä suostumusta. Jos käyttö- tai hyödyntämisoikeuksien lisensointi on ollut oleellinen osa projektin alun perin tavoittelemaa liiketoimintaa, ei edellä tarkoitettua Tekesin etukäteistä suostumusta tarvita. - Yritysten tutkimus- ja kehityshankkeiden rahoitus

13 10. MISMANAGEMENT OF ASSETS Seller Target Business BPA Transfer of assets and liabilities Buyer Target Business Retained IP Transferred IP cross-licensing As a buyer - do you have all necessary IP rights? is something needed from group companies? As a seller are you sure that all Transferred IP can be assigned? need for cross-licenses?

14 SOME POINTS FOR DISCUSSION Negotiate your Term Sheet well and already then take into account IP interdependencies - it will take you a long way Acknowledge freedom to operate and patent exposure concepts in all patent-intensive fields - typically even the best M&A process experts require operative support from your in-house team or someone familiar with the particular field Don t jeopardize your intellectual property at any stage; e.g. be careful what you use as security for your debt Make sure the loan agreements (covenants) do not restrict your business development or structural changes too much (i.e. negotiate loan covenants explicitly) If your are in a start-up, make sure that you do not give up your ownership too early on and that you have a veto/a say on important matters. However, note that: A smaller percentage of something is worth more than one hundred percent of nothing