When reviewing a startup as a potential investment opportunity, one of the business elements to consider is its intellectual property (IP). A startup’s IP is an intangible asset. Especially for businesses that are in the knowledge economy, IP can be an integral component of a startup’s unique value proposition and market position. It’s important to understand the value of a startup’s IP when assessing it as a potential investment opportunity.
What is intellectual property?
Intellectual property refers to three main categories of protected works: patents, trademarks, and copyrights.
Patents protect inventions. This is the idea behind a startup’s product or service—the details and design of how it works or is created. Several types of patents are issued by the United States Patent and Trademark Office, the following are generally the most commonly applicable to startups with IP:
- Utility patents – may be granted for a “new and useful process, machine, article of manufacture, or composition of matter,” or an improvement to any of these
- Design patents – may be granted for a “new, original, and ornamental design” for a product
A trademark is generally a word, phrase, symbol, design, or combination of these elements that identifies and distinguishes the source of the products of one individual or company from those of others. Service marks are very similar to trademarks, but, according to the United States Patent and Trademark Office, a service mark denotes the source of a service rather than that of a product. Broadly, a trademark is the protected branding (name, logo, etc.) of a company.
Copyrights are protections for the author of original literary, dramatic, artistic, musical, and other intellectual works, whether published or not. Copyrights protect the expression of content, but not the subject matter itself.
Why does IP matter?
Intellectual property matters for several reasons. First, registered IP confirms ownership of the patented or copyrighted work. This legal recognition of ownership allows the entity that owns the IP to license or sell that IP, which could be crucial for companies with a revenue stream that depends on licensing or selling the IP.
Additionally, registered IP gives the owner of the IP the legal ability to exclude others from producing, using, or selling the protected work. All of this works together to help ward off competitors that might, for example, encroach on a startup’s market position through a very similar product or design, and it similarly prevents others from infringing on trademarked branding.
A startup typically would want to have patent protection on unique features or functions that distinguish it from competitors. Startups that intend to file a patent but haven’t yet may be at risk of a third party filing a patent for the same idea before them. The U.S. awards patents on a first-come, first-serve basis, meaning that the first to file for a patent holds precedence, regardless of who actually invented the subject of the patent first.
How is a monetary value assigned to IP?
Startups can use several different methods to arrive at an estimated value for their IP. Intellectual property might be generally assigned value based on how much of a competitive edge it provides the startup or on how much revenue it will bring in through licensing fees, for example. It’s important to remember, however, that IP value is also contextual and may vary depending on how you view it—e.g., as something to liquidate versus something to fuel revenue and growth.
IP may also be valued by what a third-party would pay to obtain it. This is the market value method of assessing value and might be determined by either an interested party’s offer or by looking at what similar types of IP have been purchased for.
Another way to look at IP value is the projected income based on the IP over its lifetime. This might seem to be as simple as adding up anticipated income from licensing and royalty fees, but this is complicated by the ever-changing landscape of technology, etc., that makes forecasting the future, even by as much as five years, highly unpredictable.
If you’re a new investor, it’s easier to focus on the essentials. Check whether a startup that relies on IP for its core offerings has protected its IP by at least applying for a patent as applicable, and listen carefully to how the founders explain how they arrived at whatever value they assign their IP.
If you’re interested in angel investing or joining a regulation crowdfunding raise, check out the offerings currently live on the MicroVentures platform.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.