Set expectations. The value of IP is a small fraction of what the company was once valued at; it’s maybe 1 to 5 cents on the dollar. Any acquirer of the IP is unlikely to do an all cash deal, so don’t be surprised if the final consideration is a blend of cash, stock, royalty, earn out, or some other creative structure that reduces the acquirer’s up front risk. Selling IP is going to take a year or more with legal taking 6 to 9 months alone (we recommend specialized counsel that has M&A experience and experience in bankruptcy/winding down entities). It’s also going to take some cash along the way as you foot the bill for legal, preparing the code, and other unforeseen expenses that have to be paid well ahead of close. With those expectations in mind, you need to seriously consider whether it is worth the work to sell the IP, what you will really recover, and what the probability of success really is.
You need the CTO. In order to transfer code to an acquirer, you’re going to need the CTO or whoever built a majority of the code to assist. No acquirer is going to take the code as-is, unless you want them to massively discount the price to hedge their risk. They’re going to want it cleaned up and packaged specific to their needs. In our case, it took a founding developer 3 months of hard work to get the code packaged just right for our acquirer, and of course, we paid him handsomely for successful delivery.
Github. Put the code on Github. Have potential acquirers sign a very tight and punitive NDA before allowing them to see the code. It also may be advisable to only give acquirers access to portions of the code. Github is the best $7 a month you’ll ever spend when it comes to selling IP.
Make sure the acquirer is fair. The acquirer has to be someone that is negotiating fairly and in good faith with you. We got very lucky that our acquirer had an upstanding and reputable CEO. If you don’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 terms of the deal before close, among other things. Given the limited recourse you often have in situations like this, ‘bad boy’ acquirers do it all the time. We got lucky finding an acquirer who was honest, forthright, and kept his word. You’ll need to do the same.
Selling IP is incredibly challenging. In our case the recovery was very small relative to capital invested, the process took nearly 1 year, and there were a lot of people involved to make it happen. We also spent tens of thousands of dollars in legal fees, data scientist consulting, patent reinstatement and recovery, shipping of servers, etc. A lot of that expenditure was done along the way so we had to put more money at risk for the possibility 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 and neither do you.
Thank you for reading. Visit us at blossomstreetventures.com and email me directly at sammy@blossomstreetventures.com