Intellectual Property and the Financials

Our guest blog post comes from Dennis Purvine of CFO Selections.  Dennis is a CPA and CFO and has worked with companies in all stages of development.

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Intellectual Property (I.P.) can be protected by patent, copyright, trademark, etc.  Companies that create, or purchase, intellectual property presumably create value for their business. (More on this “value” later.)  As such, the costs incurred in acquiring the I.P., whether done in-house or purchased from an outsider, should be capitalized and shown on the balance sheet. Showing the intellectual property on the balance sheet reminds everyone, including bankers, shareholders, and eventually the potential purchasers of the business, that the company has intellectual property which may increase the company’s value.

The actual value of the I.P. is determined by the competitive advantage that the I.P. gives the company. For example, the company has a patent that allows them to make an item that is superior to the competitor’s items. This may result in a higher unit price for the item and/or an increased number of units sold – simply because they are better. Or the company may have a process that allows them to make an item, of the same quality, for a lower cost than their competitors. Again, this places the company at a competitive advantage.

This competitive advantage can be measured in terms of greater sales and/or profit compared to their competitors. When a company is being valued, either as a potential purchase or for succession planning, the value that the I.P. adds is taken into account. One client of mine produced a copyrighted product that was of much higher quality than the competition. As a result, his company produced and sold more than 90% of these items that were sold in the United States.  (Please do not tell the Federal Trade Commission!)  When the company was sold, the copyright increased the price of the sale. I have also seen companies purchased mostly to gain access to their intellectual property.

Speaking from Experience — Patents

Our guest blog post comes from Dana Fuhrman , COO of TRG Floors.  She speaks from experience about the importance of understanding your patent options and staying on top of the process.

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To Patent Or Not to Patent. Domestic only or International.  The first one should be an easy decision, right? We’re so excited about the invention and believe in it and want to protect it… but can’t help it to take a step back when you consider the costs.  Then, once you get your wind back, within one year of publication, you have to decide if you want to extend your protection internationally.  I have to file separately in EACH country? Well, which countries do I choose? How much will that cost? 

Patent protection is a critical component to ensuring the value of your product.  If you are the only company that has the right to sell your product in the USA, Canada, China and Italy (for example) the value of that potential market share increases the value of your company.  If you decide to only patent your product in the USA, someone else can sell your product in another country and earn revenues that should have been yours.

Get back to the basics, “who and where are my many types of customers and vendors.”  This should lead to plenty of discussion and resolution on which countries you should move forward with for your international patent.  Try to make decisions today based on your long term vision, unclouded from the patent process and costs.  If you can’t sleep, you could calculate the break even point identifying when you have recuperated all the patent related costs. That should wipe you out.

 My advice to my fellow inventors and entrepreneurs is… don’t be overwhelmed by the process, or the costs, just take it step by step, find a patent attorney you enjoy working with, and go for it.

Common Mistakes in Patent Protection

Our guest blog post comes from Jim Rutter of Ruttler IP Law.  Jim will be our guest speaker at our June 23 Equinox Focus Event “Protecting and Leveraging Your IP”.

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The first major mistake that is made with patents is disclosing an invention prior to filing a patent application.  Disclosure could include offering to sell an invention, actually selling an invention, distributing advertisements about an invention, publishing an article about an invention, or any other act that causes the invention to be known to the public.  The issue with disclosures is that they result in loss of the ability to seek patent protection outside the U.S. and trigger filing deadlines in the U.S. that must be met to prevent loss of patent rights.

A second common mistake that is made is not utilizing provisional patent applications.  Provisional patent applications are relatively cheap and informal applications that can be filed quickly.  They result in a patent pending status, allow disclosures to others of the material contained therein, and provide for up to a year before a more formal application must be filed.  Provisional applications are excellent tools for entrepreneurs with limited initial resources because they preserve patent rights for minimal expense while the invention is further developed.

A third mistake made is not considering design patent protection.  Most believe that patent protection is only available for functional inventions.  This is not the case as there is also patent protection available for new creative designs.  Protectable designs can include new product shapes, packaging shapes, website interfaces, font styles, and the like.  Design patents are less expensive to obtain and can be obtained quite quickly.

Intellectual Property: a necessity, a nice-to-have, or a waste of time?

Is protecting your Intellectual Property a necessity, a nice-to-have, or a waste of time?

Entrepreneurs and CEOs around the world ask this question regularly – and the answer differs for each business and each circumstance as the answer is driven primarily by what can be protected, for how long, and the risks associated with not proactively protecting your IP.

What is it?  An important first step is getting an understanding the different types of IP.  Patents are what we consider “inventions.”  They are novel, something no one has done before.  Copyrights are original works of authorship, something that has been created and put into physical or digital medium.  Trademarks are commercial.  They link a product or service back to its source.  These definitions are not the “legal” definitions but rather a high-level description for discussion purposes. 

Do I need registration? For trademarks and copyrights, you have certain rights in the IP simply by creating it or using it in commerce, as the case may be.  No registration is required but without it, IP rights may be limited.  Patents, on the other hand, must be registered and the invention must not be publicly disclosed in advance of filing.

What does registration buy you?  First and foremost, registration offers you “notice” to third parties of the details of your IP and your claim of rights to that IP.  In connection with that notice, registration also offers you statutory damages if someone infringes your rights.  Without registration, you would be required to prove damages.  

Can it really protect you?  This question is the key and the answer depends in large part on the plans of the business.  If the company is only offering its products and services domestically, it is typically easier to control the IP.  As the company expands, IP protection must be considered for each of the various countries under the relevant treaties or laws.  Companies that have expanded cross-border without first protecting their IP have missed out on opportunities to have exclusivity in that area.  This applies even for US companies looking to expand into Canada.  Of particular importance is considering IP matters in determining the location of product manufacturing.  By electing to manufacture overseas, specifically in parts of Asia, a company takes a significant risk in the possible disclosure and infringement of its IP.  For some businesses, this risk is acceptable.  For others, it is not. 

IP protection is always worth considering and pursuing where it makes sense for the business.  IP protection can sometimes get you a long term benefit in the marketplace.  In other cases, it can buy you a first-mover advantage that is short-lived.  Understanding what you have that can be leveraged for your company’s benefit and taking action to protect it, with or without registration, will build value in your company for the future.  As in most business decisions, whether registration is appropriate or necessary requires a cost-benefit analysis in light of your business model.

All that being said, I must admit to a smile when I saw Bill Gates’ quote:  “Intellectual Property has the shelf life of a banana.” Moving forward under the assumption that IP has value and maximizing that value, even for short amounts of time, can make a difference in your business’ traction and put your business on the map for growth or acquisition.