United States: Using Intellectual Property to Obtain Financing

Many new companies are started on the strength of an idea, and that idea may be the primary (if not the only) asset of the company. Turning that idea into a product takes financing. When the primary asset of your company is an idea, how can you take that idea and use it as a basis for financing?

Whether seeking debt- or equity-based financing, it is a huge benefit if an idea is protectable so that you can carve out a niche in the marketplace. In most cases, that means your idea must be patentable. Generally speaking, patents hold the most value within a company’s intellectual property portfolio. As with any other asset, if you're using a patent portfolio to pursue financing, the amount of financing will depend upon the value of your patent portfolio. What follows are some tips to help maximize the collateral value of your patent portfolio aimed at increasing your chances of getting the financing you need.

Unfortunately, the expense of preparing and filing patent applications comes at a time in a start-up company’s lifecycle when it is least able to bear the associated cost. Too often, if patents are pursued at the outset at all, the attitude is, "Let’s cover the exact product we’re going to market -- we can’t afford anything more."

While this strategy may be attractive in the short-term in terms of expenses, it can be a devastating long-term solution in terms of patent protection and one that will significantly decrease the chances of leveraging your patent portfolio into financing.

To carve out a meaningful niche in the marketplace, you must make it difficult for potential competitors to enter the market with a similar product. If your patent is limited to the specific product you expect to sell, it may be relatively easy for a competitor to "design around" your patent by changing certain features. To make it more difficult to circumvent your patent, think defensively. Anticipate alternate product designs. Put yourself in the competitor’s position and imagine how you would design a different product to compete with your commercial offering. Then, patent those alternate designs, even if you don’t ever intend to market them.

You can disclose all of your designs in a single patent application, or you can file separate applications for each design. If a single patent issues that covers all of your designs, you will have saved the cost of multiple patent application filing, issue and maintenance fees. However, if you are concerned about any of your alternate designs’ patentability, it may be preferable to disclose the various designs in separate patent applications. If you disclose an alternate design in your "main" patent application and the alternate design proves to be unpatentable, that unpatented design will be disclosed in the issued patent along with all of your patented designs. You will now have provided your competitors with a "road map" for how to design around your own patent! By disclosing alternate designs in separate applications, if those applications don’t issue as patents, your competitors will never see them, as the files of patent applications that don’t issue as patents can be maintained in confidence by the U.S. Patent Office. (Note that under the American Inventors Protection Act of 1999, patent applications are routinely published 18 months after the application is filed. If you are concerned with keeping an alternate design confidential in the event a patent on the design does not issue, you will need to affirmatively "opt out" of having your patent application published.)

If you are successful in identifying and patenting alternate ways of practicing your invention, the resulting patent portfolio can create a "halo" of patent protection significantly broader than your actual product. That, in turn, will make it more difficult for your competitors, thereby increasing the value of your patents.

The collateral value of your patent portfolio depends in part upon the geographical scope of your patent protection. One way to increase the size of your market is to file patent applications in foreign countries. A patent application filed under the Patent Cooperation Treaty ("PCT") can designate more than a hundred foreign countries and the European Patent Office for a fairly small investment. A PCT application can keep your options of pursuing foreign patents alive for up to 30 months after the filing date of your patent application before you have to incur significant expenses. During that period of time, the potential for obtaining foreign patents can increase the value of your patent portfolio and thereby enhance your chances of obtaining financing.

Similar to how the amount of money you can borrow on a house depends upon a property appraisal, the financing you can obtain based upon your patent portfolio will depend upon the value of the patents. To help potential investors gain an appreciation for the value of your patent portfolio, it is often beneficial to have an independent appraisal conducted. Approaches to appraising intellectual property will vary, but there are key factors that independent patent valuators will always consider.

The clearest indicators of the value of patents are sales or licenses of comparable patents. Actual transactions show a real market for the patented product and provide more reliable value indications than hypothetical analysis.

Where there are no actual sales or licenses of comparable patents, a "protected market" can be defined. The protected market depends upon many factors, including the breadth and strength of the patents, whether foreign patents exist, the strength of the economy, and the remaining life of the patents. Annual sales for the protected market can be projected over the life of the patents, and the present value of those projected sales can be calculated to arrive at a figure for the worth of the patents.

In addition, when patents correlate with advances that will replace existing technology, the markets for these products are already well-defined, making computation of the patents’ value easier.

Finally, the track record and industry contacts of the patent owner can affect the value of the patents. If patent owners have a strong history of innovation and product development, then they possess the experience necessary to see products from the invention stage to the market. Similarly, if the patent owner demonstrates industry knowledge or possesses influential business contacts, the collateral value of the patents is enhanced. This knowledge establishes that the patent owner knows the players in the market and perhaps has an inside track into the industry.

Once you acquire the patents and have your portfolio appraised, packaging is important. Presenting a patent portfolio to potential investors in the best possible light can significantly improve your chances of obtaining financing.

Prepare a presentation -- either written or, if you’re meeting with the potential investors in person, a PowerPoint slideshow -- that describes your product, its potential market, and the protection afforded under the patent portfolio. Include a copy of your valuation. And, since investors will undoubtedly have your patents reviewed by their own patent counsel as part of their due diligence, put an electronic copy of the patent application files, along with a copy of the presentation, valuation, and any other relevant documents on a CD-ROM to give to the investors. They will be impressed with your organizational skills, their job of evaluating your patent portfolio will be easier, and, in turn, your desired outcome for success will be positively influenced.

So, maximize the collateral value of your patent portfolio and increase your chances of obtaining the financing you need.