IP Information & News

Start-ups — how to make money from patents

Dr Terence Broderick

By Dr Terence Broderick

Senior Patent Attorney

Patents not only protect your crown jewels but open new revenue streams, helping start-ups to generate funds through licenses, mortgages and assignments. Find out what each of these are and how your start-up could capitalise in this guide to generating funds early on.

Patents for start-ups

For start-ups, intellectual property rights (especially patents) can comprise a high proportion of your company value, especially if you don’t yet have an established customer base or brand recognition.

While securing patent protection for an invention can be expensive, it’s often the only way to register protection around a technical concept, preventing others from exploiting your invention in specific territories.

It’s precisely for this reason that patents create new financial opportunities that can be especially useful for start-ups.

Licensing

A licence, in essence, is an agreement between the owner of a patent and a third party that enables the exploitation of the patent-protected invention. The revenue is generated through a royalty, paid by the third party to the patent owner. Royalties can be determined in a wide variety of ways as the third party successfully exploits the invention.

While this can seem low risk, careful attention should be paid to the terms of the licence. It’s possible that a licensee may be able to exclude your start-up from the licensed territory or field of use. This is particularly true in the case of exclusive licences. Proper diligence should therefore be undertaken to make sure that the licence doesn’t end up hindering you from pursuing your own commercial objectives.

Licensing can be particularly attractive in situations where your invention has multiple uses, especially if you only want to exploit the invention in a single field. Examples of such an invention can be a new material, process or composition with many applications.

Mortgaging

Patents (and patent applications) can also be used as collateral to secure a loan. This can enable a start-up to expand in other ways and pursue product development or further innovation objectives. Patents are particularly useful in this respect as, unlike trade marks and certain other types of IP right, their value is relatively stable and seen as secure in value.

The risk comes in when a start-up defaults on a loan — this can result in the patents or patent applications being lost. This can be offset somewhat by only using part of your portfolio as collateral, so that some of the patent rights can be retained even if you default. Additionally, given the increased risk associated with a start-up, the terms of the agreement can be heavily favourable to the party providing the loan, usually in the form of high interest rates or stricter (less flexible) repayment terms.

Assigning

Likely the least preferable option to raise funds, assignments involve selling the patent to release its value. This can be useful if the patent is no longer seen as relevant to your activities but, upon execution, the rights in the patent are given up.

It’s possible to assign patent to a third party — thereby releasing the value — which then leases the rights in the patent back to you for a fee. However, care should be given to this sort of arrangement, as there may be no way to buy the patent back (even if funds allow).

Moving forward

While any agreement that seeks to release funds from a patent portfolio should be given careful consideration, they can be valuable tools to help start-ups secure funding early on.

If you need advice about licensing, mortgaging or assigning patents, get in touch with me at tsb@udl.co.uk.

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