Tweet

How to structure your business to protect your intellectual property

Guest post by: Michael Smyth

Article Overview: It was only after Dean signed one half of the shares over to his General Manager that he realised what he had done. The intention when he sold those shares was to give away half of his Auckland business. However, what Dean had inadvertently done was give away half of his dreams and aspirations for the brand which he had spent five years building up from scratch. A simple step taken before the share sale could have avoided this problem, but Dean was now looking at buying back the shares from someone who didn’t want to sell.

How to structure your business to protect your intellectual property

Why Dean wanted a business partner

Dean’s big hairy audacious goal was to franchise his business and create an Australasian brand. Before doing that he needed to get the Auckland business profitable so that he could demonstrate to potential franchisees the value of his business model. He needed additional capital to grow and his General Manager was willing to provide that capital in return for shares. It seemed like a match made in heaven, particularly since the General Manager was an essential cog in making the Auckland business profitable and selling him shares would keep him incentivised.

However, the General Manager didn’t have Dean’s ambitions of franchising. His only concern was making the Auckland business as profitable as possible to provide an additional dividend income on top of his salary. From Dean’s perspective, he knew that he would be the one doing all the work to make the business capable of being franchised. However, by selling half the shares in his company to his General Manager, Dean overlooked that he was selling more than he bargained for.

Dean forgot about the intellectual property

An essential part of franchising is that the franchisor, in this case Dean, licences the intellectual property in his business to franchisees so they can duplicate the business. Dean had spent five years developing the IP in his business. That IP included his trademark, the know-how and the systems which he had developed to run the business. That IP was owned by his company and he had just sold half of it to his General Manager. That meant that if he was going to franchise the business half of the proceeds would belong to his General Manager, even though Dean would be doing all the work to get it to that stage.

What Dean should have done was sell half of the Auckland business only but kept ownership of the intellectual property to himself or put it in another company (and IP holding company). The Auckland business would then be in effect the first franchisee, with Dean and the General Manager as equal shareholders. Dean would then have total control over how he developed the intellectual property and would alone realise the proceeds of any franchising. Prior to the share sale, Dean should have assigned the intellectual property to his holding company and then licensed back the intellectual property to his trading company. Since the intellectual property was still being developed by the trading company, the agreement would need to provide that any IP developed by the trading company in the future would belong or be assigned to the holding company. The trading company would pay a licence fee back to the holding company for the use of the IP to run the business.

The effect of the licence fee

By doing this the value of the trading company is less than if it owned the intellectual property since the valuation would need to take into account the ongoing licence fee back to the holding company and the inability of the trading company to develop the IP further. However, the business would still be valuable since it was a profitable trading entity and still had the potential to make more profit thereby achieving the General Manager’s goals. The separate IP holding company in turn would allow Dean to develop his IP into a franchise model.

So by structuring the business to create an IP holding company, it was able to achieve both parties’ goals. As it was, the General Manager had ended up with an asset which he didn’t really want but which could be quite lucrative for him in the future.

Dean was now stuck

Having sold half of his intellectual property, Dean now had a problem of how to get it back. Whilst the General Manager didn’t need half the intellectual property he did see the future value and potential in having it and wasn’t going to give it up easily. Whichever way Dean decided to get the IP back, he knew that it was going to cost him money.

Related Articles
  Intellectual Property – The 3 Branches: Copyrights, Patents & Trademarks
  Using Trademarks and Patents Together = Double Protection for your Business
  Intellectual Property Protection Minimum Standards
  The importance of Intellectual Property when buying or selling a business
  Business Speaker is a Thief
  Federal Requirements
  Your number one investment
  Protecting Your Ideas
  How to protect your IP being stolen by your employees
  Protect Intellectual Property When Employees Leave
  Little Things That Can Make Property Management Easier
  Intellectual Property Rights - The Chinese Challenge
  Comparing Home Coverage
  Protecting Confidential Information Mums the word
  May the force be with you Leverage is everywhere you look
  What's in a Name?
  What Should Be In My Contract? A Contract And Why You Need One
  What is an automatic stay?
  Management of Intellectual Property- Finding your Forgotten Business Asset.
  What is a franchise?

Article Tags: business partner, general manager, intellectual property, intention



Related Forum Posts
How Well Protected Are The Patent Holders? - Intellectual property laws vary from jurisdiction to jurisdiction. And it is such that the acquisition, registration or enforcement of the rights must be pursued or obtained separately in each territory of interest. Intellectual property in law is a general term for various legal entitlements. The holder of this legal entitlement is generally entitled to exercise various exclusive rights. Intellectual property laws are designed to protect different forms of subject matter, in this case a Patent. A patent may be granted for a new, useful, and non-obvious invention, and gives the patent holder an exclusive right to commercially exploit the invention for a certain period of time, typically 20 years from the filing date of a patent application. Patents, trademarks, and designs rights are sometimes collectively known as industrial property, as they are typically created and used for industrial or commercial purposes. Various schools of thought are critical of the term “intellectual property”. Some characterise it as intellectual protectionism. From the perspective of economics, intellectual property is a temporary monopoly on the use or exploitation of that Patent, supported by legal enforcement mechanisms. There is a debate going on every where that intellectual property laws truly operate to confer the stated public benefits, and whether the protection they are said to provide is appropriate in the context of innovation derived from such things as traditional knowledge and folklore, and patents for software and business methods. Manifestations of this controversy can be seen in the way different jurisdictions decide whether to grant intellectual property protection in relation to subject matter of this kind, and the divide on issues of the role and scope of intellectual property laws. Most exclusive rights are the right to sue an infringer, which has the effect that people will approach the patent holder for permission to perform the acts to which the patent holder has exclusive right
Legal due diligence - It seems like you've gotten a lot of advice on how to "value" your prospective venture. But here is something else to keep in mind: do the legal due diligence. 1. What type of structure is it? Corporation, LLC, etc? Is it in "Good Standing?" 2. Does the business have any written contracts, if so with whom? (E.G. advertisers, vendors, employees) 3. Who owns the intellectual property? Copyrights to content, trademarks? 4. How is revenue generated? How do the sellers want to be compensated? Are they willing to do an earn-out? 5. Are there any lawsuits pending or threatened? These are just a couple ideas....
Re: Top Banner Help - Kevin, You should use the same color the forum have and a similar structure. By the structure I think you should consider the Box structure like on the forum, it looks more organized. and can be very easily accomplished with some html, css and php. A good example of structure is the CNN website. For instance the Random Entrepreneur box on the home page disconnects you from the rest of the site. It's too tall, that content could easily fit on a 280x300 side box (just an example). The content background should be white or a lighter color. If not possible, the page "/EvanAbout.html" has a much better layout and colors combination. BTW, I just found a couple glitches that show on firefox (19% of internet users): 1)the homepage links when roll over go completely blue, I would set the "a" color on rollover to #ffffff to fix that. 2)the forum the side box TDs are using the HTML property "background", making the background repeat itself. you should probably use the CSS bg property with the no-repeat attribute.
Better to Be Prepared - [quote="jvprosperity":3m5dngre]That's a good point... What are you currently doing to protect your business? Do you have insurance on your place of business? How are you protecting your information? How are you protecting your assets? Do you keep offsite backups of data? How do you protect your intellectual data? Are you protecting your business from being sued?[/quote:3m5dngre] It is much better to prepare - of course we can't prepare for everything. But there are many things we can do to be ready. Since we never know when a disaster - natural or otherwise will happen - its good to be as prepared as possible. Chris
Re: Changing trends - Similar to licensing a patent or any other intellectual property right? I just wasn't familiar with the term although I think I've heard it before.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Marketing & Sales tools – going back to basics

What is Discretionary Cash Flow

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.