In 2017, we had adeath in the portfolio. Once all theemployees left, the only remaining assets were some patents, servers, domains,and a lot of code. Eventually we managedto sell that intellectual property (“IP”). Here is what we learned.
Setexpectations. The value of IP is a smallfraction of what the company was once valued at; it’s maybe 1 to 5 cents on thedollar. Any acquirer of the IP isunlikely to do an all cash deal, so don’t be surprised if the final considerationis a blend of cash, stock, royalty, earn out, or some other creative structurethat reduces the acquirer’s up front risk. Selling IP is going to take a year or more with legal taking 6 to 9months alone (we recommend specialized counsel that has M&A experience andexperience in bankruptcy/winding down entities). It’s also going to take some cash along theway as you foot the bill for legal, preparing the code, and other unforeseenexpenses that have to be paid well ahead of close. With those expectations in mind, you need toseriously consider whether it is worth the work to sell the IP, what you willreally recover, and what the probability of success really is.
Reachout to everyone. If you’ve decided it’s worth itto try and recover something for the IP, reach out to absolutely everyone youknow. That includes old customers,prospects, former customers, anyone who has ever solicited you for acquisition,your cousin, your aunt, etc. The point is don’t eliminate anyone as a potentialacquirer as you don’t know what’s on someone’s product roadmap and be shamelessabout reaching out to your entire network. The acquirer of the IP in our dead company was a prospect who neveractually became a customer. We also hadinterest from very random firms that weren’t remotely adjacent to our space.
Youneed the CTO. In order to transfer code to anacquirer, you’re going to need the CTO or whoever built a majority of the codeto assist. No acquirer is going to takethe code as-is, unless you want them to massively discount the price to hedgetheir risk. They’re going to want itcleaned up and packaged specific to their needs. In our case, it took a founding developer 3months of hard work to get the code packaged just right for our acquirer, andof course, we paid him handsomely for successful delivery.
Youneed great counsel. The code was once part of acompany, and that company has liabilities, creditors, equity owners, formeremployees, and various other obligations. All of those parties are probably pretty upset with you that things didn’twork out. Before you embark on a path tosell the IP, consult with an attorney that can tell you who has a right to anyproceeds collected, what the waterfall of recipients looks like, who canpotentially block a deal, who you need to get approval from, whether patentsare in good standing, etc. You’ll needto pay the attorney up front for his work and as you progress through the deal,so it takes money to make money from selling IP.
Github. Putthe code on Github. Have potentialacquirers sign a very tight and punitive NDA before allowing them to see thecode. It also may be advisable to onlygive acquirers access to portions of the code. Github is the best $7 a month you’ll ever spend when it comes to sellingIP.
Getall the assets. Make sure you have access to allthe assets. This includes all code, training modules, patents, domains, actualservers and hardware, trademarks, logos, etc. An acquirer is going to want absolutely everything even if there aresome things he can’t necessarily use.
Makesure the acquirer is fair. The acquirer has to be someonethat is negotiating fairly and in good faith with you. We got very lucky that our acquirer had anupstanding and reputable CEO. If youdon’t trust the acquirer or if they’re being shifty, move on. In our case, had the acquirer been a bad guy,there were many times when he could have screwed us such as changing the termsof the deal before close, among other things. Given the limited recourse youoften have in situations like this, ‘bad boy’ acquirers do it all thetime. We got lucky finding an acquirerwho was honest, forthright, and kept his word. You’ll need to do the same.
Bepatient. Since the purchase price willlikely be heavily earn-out or royalty based (the chances of getting an all cashdeal up front are slim), you’ll need to be patient as the acquirer’s dev teamabsorbs the code, the sales team gets up to speed on new capabilities, and theacquirer evangelizes your product to the world. If everything goes smoothly, getting fully paid 18 to 24 months afterthe day the acquirer bought the code would be lucky.
Selling IP isincredibly challenging. In our case therecovery was very small relative to capital invested, the process took nearly 1year, and there were a lot of people involved to make it happen. We also spent tens of thousands of dollars inlegal fees, data scientist consulting, patent reinstatement and recovery,shipping of servers, etc. A lot of thatexpenditure was done along the way so we had to put more money at risk for thepossibility of maybe recovering cash in the sale of IP. It wasn’t easy, but it got done. Hopefully we never have to do it again andneither do you.
Thank you for your readership. Seemore blogs and SaaS data at blossomstreetventures.com. Email the author atsammy@blossomstreetventures.com.