The most contentious part of any new product development is often the question of who should own the existing IP (intellectual property). This is wrong, what each party should concern themselves with is who should own the future revenue. Personally, I would be happy for my partner to own all the IP if I get all the money.

IP is important to a new product in the same way that foundations are important to a new house.  No-one would invest in a building if they think that the foundations are not sound and it may collapse later. Similarly, no-one will invest in a new product if they fear that IP issues may cause it to collapse later.

The analogy is a good one because just as no prospective purchaser ever looked at a new house and said “great foundations” so prospective purchasers are unlikely to look at your product and say “great IP” they are going to be far more interested in customer base, cashflow, market size, potential for further distribution etc.

The goal is to create sound foundations for the new product. This will normally require clear, irrevocable and exclusive assignment of all existing and future IP to a single entity in exchange for shares or a royalty.

Unfortunately most IP owners clearly demonstrate the endowment effect; that is they place an irrationally high value on what they have now, IP, compared to what they hope for, a share of future income. This manifests itself as a reluctance to make an unambiguous assignment of IP to the new product.

The principal risk that IP owners suffer when they make an irrevocable assignment is non-performance of assignee. So, they reason that if they don’t make an exclusive, irrevocable assignment then they can always have another go later on. If it were not that no-one would partner with them on this basis it would be a good plan. In my experience most IP owners would rather have 100% of IP worth nothing than a small percentage of a product worth a fortune.

Given that IP must be assigned irrevocably and exclusively how can IP owners reduce their risk?

The most important factor is to agree a business plan before agreeing the IP arrangement. This ensures that expectations are aligned. It is likely that the business plan will show that additional resources will be required from the IP holder and this should be reflected in a greater share ownership, royalties or expense payments. A new product is far more likely to hit its revenue objectives if it actually has revenue objectives.

There is often a vague hope by all parties that someone will make the product a success but a clear understanding that, “that someone” will not be them. All parties must make sure that there is a single individual who has the responsibility and the incentives to make it a success. This is invariably very expensive, either in cash or shares because the parties are asking someone else to take a risk that they are clearly not willing to take themselves.

Finally, it is worth having buy-out clauses where one partner can buy out the other. Depending on your actual situation these could be binding incentives to management, for example,

“A will purchase B’s shares/royalty rights for $ 1M if…”

or as simple as

“either party may offer to purchase the other’s rights at fair value. There is no obligation for the offer to be accepted”

It is not worth spending too much time on planning for failure because most new products only have a very limited time when they have any value and if the first team can’t make it work it is very unlikely that anyone else will because the market will have moved on.

In summary; put all your IP in one place, make a business plan and incentivize someone to deliver it. Don’t spend much time planning for failure because you only have one chance to launch a new product.

If you would like help commercializing IP contact me at Doctor-IT Limited.