Why Intellectual Propoerty ownership matters for founders
When founders think about ownership, their minds usually go straight to the cap table. How much equity do I keep? How much do I give away to raise the money I need? However, focusing on the cap table alone can make it easy to lose sight of one of the most crucial elements that makes your company valuable. If you’ve seen Dragon’s Den, you’ll know what Deborah Meaden is going to ask... do you own the intellectual property (IP)?
Commonly, IP tends to get put in the "we'll deal with it later” pile. This creates a risk it doesn’t get dealt with, in which case it can present significant obstacles to concluding fundraising or during an acquisition/ exit. If who owns the business and what the business owns are not lined up, you have a gap, and gaps have a way of surfacing at the most inconvenient times.
Why investors and acquirers care about IP ownership
Investors care about a number of specific things.The main thing they care about when listening to your pitch is not just, unfortunately, your team or your idea, instead they are thinking about their bottom line – how will the investment produce a return and when will it be realised? Investors want to back businesses that will generate value down the line. You can have a great product and a huge market in front of you, but if there's any doubt about who owns the underlying IP, those conversations slow down or start to stall. It is the same situation with acquirers. Only sometimes a bit more brutal as they're not only looking at how the business performs today but the longevity and security of the assets they'd be buying.
Investor due diligence can be challenging. It can feel like an intrusive and forensic comb through the details and background of a business. Both investors and acquirers will dig into how IP was created, by whom, and under what agreement. What they will hope to find is a clean chain of ownership, with clear and appropriate contracts setting it up. Ambiguity can readily constitute unacceptable legal and commercial risk which can pull your enterprise value down, drag out negotiations, or in the worst case send an investor walking.
How IP ownership gaps develop in start-ups
The IP ownership gap is rarely intentional but it can appear and widen without much notice.
IP created before the company was formed - a lot of founders start building before the company legally exists. This is fine but can often mean calling in favours from friends/ classmates/ family, none of whom have formally assigned across to vest in the business. Unless there is an agreement between the parties explicitly assigning the IP to the company, ownership often stays with the person who did the work. This might only be discovered years later, during which time people may have drifted apart, fallen out or simply moved on. Fixing these issues after the event can be harder and more expensive, especially if the company and brand is becoming successful and the sums at stake are larger. Although it can feel awkward to document these things at an early stage, this discomfort is worth suffering to avoid potentially ugly (and costly) problems down the line.
IP developed through research or employment - companies that grow out of academic research or a side project during employment need to be especially careful. Respect your roots and be mindful that research funding terms, university IP policies, or an old employment contract will likely have address IP ownership in a way that might not leave ownership of inventions where you think they are. So read the fine print and figure out if you need a licence to commercialise.
How an IP audit can identify ownership gaps
If you’re unsure where you stand, an IP audit can help and, good news, the UK IPO offers funding for businesses. An IP audit maps every asset the business relies on, checks the chain of title, and flags anything that needs fixing so you can close the gaps before a buyer or investor spots them first.
Protect your IP before investment or acquisition
While the cap table says who benefits from your success, it is the IP that makes that success possible in the first place. Founders who take the steps to align these two factors early on are far more likely to build a more investable, more scalable, and ultimately more valuable business.
We will be attending Glasgow Tech Week, so hopefully see you there, do say hello if you see any of us!
How our corporate and IP lawyers can help
Our specialist corporate and IP teams, based in Glasgow, bring a depth of knowledge and expertise in advising companies about issues such as this so please do get in touch if you think your venture needs a bit of an MOT to check the chain of IP ownership is intact ahead of investment rounds.
