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Preparing Your Portfolio for Prime Time: IP Due Diligence
The document outlines the importance of intellectual property (IP) in attracting potential investors, emphasizing the necessity of a well-defined IP strategy aligned with company goals. It explains the IP due diligence process, including what investors want to know, and how companies can prepare for it effectively through internal audits and strategic planning. Additionally, it highlights the role of legal counsel in navigating IP due diligence to maximize investor confidence and investment potential.
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Preparing Your Portfolio for Prime Time: IP Due Diligence
- 1. Mintz Levin. Notyour standard practice. Preparing Your Portfolio for Prime Time: IP Due Diligence
- 2. Content 2 • How importantis IP to a potential investor? – Some thoughts about an IP strategy • What is an IP due diligence? – The Process Explained • How should you prepare for an IP due diligence? – Internal Audit Strategy • Who can help?
- 3. How Important isIP to a Potential Investor? 3
- 4. • IP isfrequently the reason for the investment • Strong IP can ensure that a company has some market exclusivity • IP protects the revenue stream • Without strong IP, sales and/or price will erode VC Investor How Important is IP to a Potential Investor? 4 “Without IP there is nothing to invest in.”
- 5. • Develop anIP Strategy and link it to the Company Goals • Any company worth an investment is always established with well-defined goals and objectives – These goals and objectives drive the conduct of the business and guide most decisions – The goals and objectives should inform the IP strategy as well (and hopefully there is one) Make the IP Attract Attention 5 Company Goals Company IP
- 6. The Role ofIP in the Business 6 • For technology-based companies, Intellectual Property is a critical and evolving (and costly) asset of the business – It supports and facilitates the company’s quest to attain its goals • BUT, effective IP requires a strategic approach with thoughtful care and feeding • Be flexible – changes in the business may necessitate changes in the IP strategy • Remember – the business drives the IP strategy
- 7. Thinking Strategically AboutPatents 7 • Offensive / Blocking: Blocking patents will be necessary to prevent competitors from copying your technology. These have the highest value. • Defensive / Leverage: In highly competitive fields, having leverage over your competitors will be important to prevent lawsuits, provide opportunities to counter sue, force a license, etc. The value of having leverage over competitors will increase as the company grows.
- 8. The Value ofa Well Executed IP Strategy 8 • IP can create barriers to entry and provide market exclusivity ― Increase (or preserve) revenue and maximize profit margin • IP can be enforceable against infringers • IP can provide a direct revenue source (license royalties) • IP can provide leverage (defensive patents)
- 9. Adding More ValueThrough IP 9 • Design the IP to maximize its value – For patents: multiple patents and multiple types of claims to best protect the technology and its improvements – Cover your product and its improvements – Cover improvements on your competitors' products (leverage) – Consider design patents – a cheaper and alternative form of protection – Consider trademark protection if you are selling product
- 10. Adding More ValueThrough IP 10 • Design the IP to maximize its value – For patents: multiple patents and multiple types of claims to best protect the technology and its improvements Cover Cover your product and its improvements Cover improvements on your competitors' products (leverage) Consider Consider design patents – a cheaper and alternative form of protection Consider trademark protection if you are selling product
- 11. What is anIP Due Diligence? 11
- 12. What is anIP Due Diligence? 12 • Investors: "Will the IP help us win this bet?" • Seeks to assess the extent to which a company’s IP and its IP strategy will support the goals and objectives of the company – Helps investors confirm that a company is worth an investment and that it justifies the magnitude of the planned investment • TIP: Stakes are high, so the company has to be sure that its house is in order before the investors “look under the hood”
- 13. Things Investors WillWant to Know 13 • Patentability: Will patents be granted? • Claim Scope: How broad (or narrow) is the protection? Will it cover the technology and design-arounds? • Coverage: Are there multiple layers of protection and is the geographic coverage acceptable? • Ownership: Does the company own the IP? Alone? • Enforceability: Can patents (claims) be enforced against competitors? Any easy targets for validity challenges?
- 14. Things Investors WillWant to Know (cont'd) 14 • Freedom-to-Operate: – Patents grant a right to exclude. They do not ensure a right to use! – Remember: an improved and patented technology may be dominated by a more basic patent. – Do third party patents stand in your way to market? • Agreements: – Any issues with past employment agreements of key employees? – Relevant license agreements and onerous terms? – Are non-employee consultants obligated to assign to the company?
- 15. Things to Expectin an IP Due Diligence 15 √ The company’s products and intended products √ The strategy is the company pursuing to protect its IP √ The key competitors √ The proposed markets √ The IP portfolio – an itemized list of all patents and pending applications √ The key prior art in the field and how it affects patentability √ The relevant third party patents / pending applications √ Any potential barriers to FTO √ Any agreements the company has with employees and outside consultants √ Any technology licensed granted to the company The scope of a due diligence will depend on the size of the investment. For significant investments any potential investor will want a great deal of information and documentation. Among the information that will be requested is:
- 16. Things to Expectin an IP Due Diligence (cont'd) 16 √ How well do the issued and pending claims cover the product/proposed product? √ Does the company have clear title to all of its IP? √ How well is the IP portfolio constructed and can it keep competitors away from the company’s key products and their likely improvements? √ Are there any likely FTO issues? Counsel for the investors will undertake a detailed evaluation of all of this information. Ultimately, the question is whether the company IP strategy is paying off – whether it is supporting the business strategy and whether it will help the company succeed. For a company looking to launch a product, investor counsel must answer the following fundamental questions:
- 17. The Process 17 • Investorcounsel will ask for all relevant information and documentation • The investors and investor counsel typically meet with the company to learn about its technology and its strategy
- 18. The Process (cont'd) 18 •The investor team will gain an understanding of: The competitive environment Study all issued patents and prosecution histories Study all pending patent applications and prosecution histories Ask for and review results of any patentability and FTO searches Conduct independent searches Assess conduct of patent prosecution Assess FTO issues
- 19. The End Resultof an IP Due Diligence 19 • Investor counsel will issue a detailed report, that: – Identifies the IP portfolio – Comments on claim scope and likelihood that claims will be allowed – Comments on the value/scope of the claims – (Possibly) recommends alternative strategies – Identifies and discusses potential barriers to patentability – Identifies weaknesses in the strategy and portfolio – Discusses FTO and potential obstacles • THIS REPORT IS WEIGHED HEAVILY BY INVESTORS • IT IS ESSENTIAL TO GET A FAVORABLE REPORT
- 20. How should youprepare for an IP due diligence? 20
- 21. How should youprepare for an IP due diligence? 21 • Do your own due diligence, such as an internal audit – and do it as early as possible – BENEFITS: • Help uncover any issues well in advance of the actual due diligence • Company will be able to anticipate the hard questions likely to be raised by the investor team and provide answers that (hopefully) are able to demonstrate that significant issues do not exist • Company demonstrates to its potential investors a high level of sophistication and a commitment to “get it right” – RESULTS: • Steps can be taken to remedy any IP deficiencies and to mitigate any risk
- 22. How should youprepare for an IP due diligence? (cont'd) 22 • When the company does its own pre-due diligence audit, it must take a critical look at its IP portfolio How well do the issued and pending claims cover the technology? Are there easy design- arounds? Do the claims have sufficient breadth to encompass product advancements? Is there a possibility of covering competitors’ products? What is the level of risk presented by third party patents?
- 23. 23 Assets Liabilities Patents Significantprior art Pending applications Third party blocking patents IP license agreements Chain of title and ownership issues Employee and consultant agreements Unnecessary claim amendments during prosecution Trade secrets Prior employment agreements and obligations of R&D personnel Trademarks Copyrights A Good Strategy for the Internal Audit An “audit” is typically an accounting exercise, so treat it that way. Think of the audit results in terms of a balance sheet and tabulate the assets and liabilities.
- 24. A Good Strategyfor the Internal Audit (cont'd) 24 • Designate a point person, preferably one who understands IP and the company’s technology and business goals • The point person should work with company legal counsel • Identify and articulate the IP strategy • Highlight the strengths • Identify the weaknesses • Remedy and be prepared o explain the weaknesses
- 25. Defending the DueDiligence 25 • Anticipate and be able to address the "difficult" issues • Rely on legal counsel and use the results of the internal audit • Use the internal point person to coordinate the due diligence and communicate with the investor team – Through this person, articulate the company’s business strategy, its goals, and its IP strategy • TIP: Package all information – spreadsheets listing all IP, lists of prior art and third party patents – so that it is readily available to investor counsel – Investor team will appreciate readily available copies of patents and applications, prosecution histories, and company agreements
- 26.
- 27. Who can help? 27 •While it is essential for a company employee to serve as the internal point person for the due diligence and any pre-due diligence audit, don’t forget to engage company counsel – BENEFITS: • Invaluable resource for the company both during a pre-due diligence audit and the due diligence itself • Experienced in running an IP due diligence for investors as well as defending IP due diligences for companies seeking investment • Able to properly position the key IP assets and recognize any significant liabilities • Involvement at early stage ensures that counsel is well apprised of the company’s IP strategy • Can offer suggestions to further improve upon the company’s strategy
- 28. Who can help?(cont'd) 28 Ideally, the audit is conducted well before any due diligence If any issues cannot be fully resolved before the due diligence, counsel will, at the very least, have ample opportunity to: •Assess any issues •Formulate a strategy that will hopefully alleviate or minimize any concerns by the investor team
- 29. Member Boston 617.348.3046 WGeary@mintz.com JD, Case WesternReserve University School of Law BS, Polymer Engineering, University of Massachusetts - Lowell Bill Geary 29 • Experienced patent and trademark attorney with a particular background in medical technology, polymers and advanced materials, and chemicals • Provides counsel on all phases of patent and trademark law, through development strategy, protection, and exploitation of patent and trademark rights • Clients include start-ups, large companies such as Johnson & Johnson, medical technology manufacturers, and research institutions such as Massachusetts General Hospital • Represents clients in federal district courts and before the International Trade Commission • Recognized for his broad expertise, having received rankings from Super Lawyers in both the Corporate Counsel Edition and the Business Edition All information contained herein is proprietary to Mintz Levin and considered confidential. This document presents general information about Mintz Levin and is not intended as legal advice, and it should not be considered or relied upon as such.
Editor's Notes
- #2 Potential investors need to know what they are buying. They only want to make bets they think can win and the due diligence helps them understand the factors involved in getting the desired return on their investment and the timing of the return. They also want to be sure that the size of the investment is justified and understand the risk factors and the factors that are likely to influence a desirable return. Hence, investors conduct a detailed look “under the hood” of the company and the company’s IP is at center stage.
- #7 At end of slide: It goes without saying that if the goal of the company is to launch a particular product, the company must develop a robust IP portfolio around that technology that creates barriers to competitors entering the same market.
- #13 After bullet 2: By the time any significant IP due diligence is conducted, the investor team has pretty much decided to fund the company, and the size of the investment is at least preliminarily established. However, the results of the due diligence can affect the size of the due diligence or even send it off the tracks.
- #22 After bullet 1: The company should endeavor to undertake its own critical evaluation of its IP.
- #23 After bullet 1: It is essential to determine how well the company is executing on its IP strategy and whether it remains consistent with and supports the business goals
- #24 Beginning of slide: A critical, self-evaluation should be conducted well in advance of any possible due diligence by an investor team. This type of audit, if conducted at a sufficiently early stage will allow the company to identify any deficiencies in its IP and execute and needed course corrections well before they are discovered by an investor team.
- #26 At end of slide: This too demonstrates a commitment to the investor team and a willingness to help ensure a quick and convenient due diligence.
- #28 After "benefits" bullet 3: It is, in fact, essential to identify liabilities at an early stage and take any possible remedial actions. In way in might even be possible to eliminate liabilities from the balance sheet before they are ever uncovered by potential investors. At end of slide: Ideally, the audit is conducted well before any due diligence. To the extent that any issues cannot be fully resolved before the due diligence, counsel will, at the very least, have ample opportunity to assess any issues and to formulate a strategy that will hopefully alleviate or minimize any concerns by the investor team.