Entrepreneurs seeking to maximize the startup valuation must go beyond the “usual IP suspects,” that is, patents, trademarks, copyrights and trade secrets. I call these forms of IP the “usual suspects” because they are what entrepreneurs and their advisers invariably focus on when questions about protecting startup value arise. While these common forms of IP are valid ways to create value for many business models, often they are only part of the picture–or they should perhaps not even be in the picture at all.
It is interesting to note that these “usual IP suspects” comprise a subcategory of the broader class of “intangible assets.” For most startups, the majority of value lies in intangible assets, however, entrepreneurs frequently ignore those forms of intangibles that do not fall into the well-known categories of patents, trademarks etc. Failing to actively manage the full scope of intangible value will undoubtedly lead to a lower startup valuation when investment is sought or at exit.
So, how do startup entrepreneurs determine what form(s) of intangible asset protection are appropriate for their specific business model? As I wrote about in a previous blog post, entrepreneurs must ask 2 questions:
- What aspects of my business model differentiate me from my competitors?
- Would I find it difficult to meet my revenue projections and desired exit payback if someone copied the differentiated aspects of my business model?
If the answer to the second question is “yes,” the entrepreneur must work to protect the business model aspects identified in the first question. While some forms of the identifiable business model differentiation that create value are no doubt protectable by deploying one or more of the “usual IP suspects,” others more properly fall under the rubric of “intangible assets.” Some examples of this are:
- Contracts with customers or suppliers
- Customer relationships
- Employee specific knowledge or other institutional expertise
- Business processes that add efficiencies or lower costs
- Brand equity
- Vertical or horizontal integration
These intangible asset forms create value for the startup and, as such, require diligent protection by the business team. As one example, a relationship with a large customer can create a significant amount of revenue, perhaps even more than ever could be achieved from obtaining patent protection. Moreover, this relationship creates differentiation in the marketplace because the customer buys the startup’s product and not that of other companies. The loss of this contract revenue would likely prove devastating and, as such, is unquestionably an intangible asset. Once the contract is identified as an intangible asset that matters to valuation, the startup team must see that this customer relationship is “protected” so that this revenue can be maintained over the long term.
Notably, the value generated by intangible assets like those set out above are not within the purview of an IP attorney or perhaps that of any attorney. The responsibility for identifying, capturing and protecting such intangible assets, and the value that flows from them, is therefore the job of the business team. In short, if the entrepreneur ignores intangible assets, it is highly unlikely that this important form of business value will make it onto the company’s balance sheet with the result being that the value cannot be realized.
I will be writing more about non-IP forms of intangible asset value in subsequent blog posts. If you have any questions in the meantime, reach out to me at jhutter@leanlegalteam.com or check out my IP Asset Maximizer Blog where I have been ruminating on IP Strategy topics since 2008.
