Understanding intellectual property (IP) rights is crucial in order for entrepreneurs to maximize their ventures. IP is often one of the most valuable assets for a startup.[1] There are four types of IP protection: (1) copyright, (2) trademark, (3) patent, and (4) trade secret.[2] Each IP type is unique and can protect a founder’s IP differently. For example, a trademark can be a word, phrase, symbol, design, or a combination of these that identifies a founder’s goods or services.[3] A brand can set a business apart and create brand loyalty through the use of a trademark.[4] In contrast, a patent gives an inventor the right to “exclude others from making, using, offering for sale, or selling an invention.”[5] For an inventor, this can be a crucial protection as it can incentivize investors to help finance the venture because a patent gives the founder the exclusive use of the invention.[6] There are several key benefits to a founder obtaining and protecting their IP. One of these benefits is the ability to license the IP.
There are several key benefits to a founder obtaining and protecting their IP. One of these benefits is the ability to license the IP.
After an entrepreneur identifies and protects their IP, licensing those rights allows the founder to start monetizing that IP. Licensing is the process by which a business grants another business the right to use its intellectual property.[7] This process is typically done through a contract (licensing agreement) where the licensor (owner of the IP) grants the licensee (entity wishing to use the IP) specific rights and defines the limits of the license.[8]
A common mistake startups make is not fully appreciating their IP assets, leading them to forgo fruitful strategies.[9] However, there are several reasons why entrepreneurs should incorporate IP licensing into their company’s business plan.
The first reason that licensing is advantageous to entrepreneurs is that it allows the startup to generate a new revenue stream. Licensing enables businesses to monetize their IP by receiving royalty payments (or a monetary lump sum) for allowing the licensee to use the IP.[10] With IP licensing; the owner can obtain these revenues by selling the IP rights and giving permission for others to use them.[11] An IP license permits others to use the IP without infringing, however all ownership still belongs to the IP licensor.[12] By generating supplementary revenue, an entrepreneur can then reinvest that money into research and development to create more IP.
Another reason entrepreneurs benefit from IP licensing is because it expands the startup's market reach.[13] A licensee may bring the IP into a completely different market than the licensor is operating in. This situation is a win for entrepreneurs who can tap into a completely different market, either internationally or domestically, without the expenditure typically needed for such diversification.[14] Successfully diversifying and positioning the brand into a new market without licensing would require immense spending, including paying production, distribution, and marketing costs.[15]
IP licensing also attracts investors. The valuation of a startup is influenced by its IP assets, especially in the early stage where cash and tangible assets may be limited.[16] Investors view robust IP portfolios as indicators that the company has a potential for market disruption, growth, and future profitability.[17] If a company has the ability to license IP and the company adopts an IP licensing strategy, investors are likely to view the venture as having a higher valuation, leading them wanting to invest and help to grow the venture to be as profitable as it could be.[18] Additionally, startups that are able to showcase protected and licensable assets demonstrate its present value and its potential future impact.[19] Investors are drawn to these types of portfolios and strategies because there are exclusive advantages that startups can utilize, high-margin licensing deals, and barriers to entry for competitors.[20] For example, investors view patents as a proxy for quality of early entrepreneurial ventures because the U.S. Patent and Trademark Office has declared that the patent holder has created something new and useful.[21] The patent protection of the invention means that the entrepreneur can exclude others from the marketplace, except through patent licenses which yields revenues for the entrepreneur.[22]
In addition to incentivizing investors, IP licensing allows the entrepreneur to control how licensees use the IP. Suppose an entrepreneur enters a licensing contract with a third party. In that case, the entrepreneur can dictate the terms of how the third party can utilize the asset.[23] Therefore, licensing is also an excellent way to limit the risk of infringement because the licensing agreement outlines the specific rules, duration, and scope of the IP use.[24] If the entrepreneur explicitly states how they want a licensee to use the protected work, then the licensee is less likely to use the asset in an infringing way.[25] This also helps with brand reputation and maintains the IP’s competitive advantage.
Finally, the last way IP licensing can help entrepreneurs is by helping the entrepreneur collaborate with other ventures. IP licensing allows entrepreneurs to pool resources, share technologies, and co-develop distribution agreements.[26] Many forward-thinking companies forge collaborations with other companies to gain technologies, capabilities, and markets.[27] A popular and successful company utilizing this advantage is Disney licensing its IP to third-party vendors to allow for the sale of merchandise.
Keeping these licensing considerations in mind can help an entrepreneur protect their company’s IP, control its use, attract investors, and create new revenue streams along the way.
[1] See Chris Sloan and Emily Brackstone, Corporate and Intellectual Property Considerations for Startups Seeking Venture Capital Funding, American Bar Association (July 01, 2018), https://www.americanbar.org/groups/intellectual_property_law/publications/landslide/2017-18/july-august/corporate-intellectual-property-considerations-startups-seeking-venture-capital-funding/?login.
[2] See The Four Types of Intellectual Property, Columbia Law School, (Jan. 23, 2024), https://execedonline.law.columbia.edu/blog/starting-a-business/types-of-intellectual-property/.
[3] See Trademarks, World Intellectual Property Organization, https://www.wipo.int/trademarks/en/ (last visited April 21, 2024).
[4] See Why Intellectual Property is Essential for your Business, World Intellectual Property Organization, https://www.wipo.int/sme/en/ (last visited April 21, 2024).
[5] See Patent Essential, United States Patent and Trademark Office, https://www.uspto.gov/patents/basics/essentials (last visited April 21, 2024).
[6] See Why Intellectual Property is Essential for your Business, World Intellectual Property Organization, https://www.wipo.int/sme/en/ (last visited April 21, 2024).
[7] See Martin Douglas Hendry, Licensing Intellectual Property: A Way to Business Growth, Virtuoso Legal, https://www.virtuosolegal.com/faq/licensing-intellectual-property-a-way-to-business-growth/ (last visited April 21, 2024).
[8] See id.
[9] See Chris Sloan and Emily Brackstone, Corporate and Intellectual Property Considerations for Startups Seeking Venture Capital Funding, American Bar Association (July 01, 2018), https://www.americanbar.org/groups/intellectual_property_law/publications/landslide/2017-18/july-august/corporate-intellectual-property-considerations-startups-seeking-venture-capital-funding/?login.
[10] See Martin Douglas Hendry, Licensing Intellectual Property: A Way to Business Growth, Virtuoso Legal, https://www.virtuosolegal.com/faq/licensing-intellectual-property-a-way-to-business-growth/ (last visited April 21, 2024).
[11] See IP Assignment and Licensing, World Intellectual Property Organization, https://www.wipo.int/sme/en/assignment-licensing.html (last visited April 21, 2024).
[12] See What is an Intellectual Property (IP) License, Weiss Brown (June 29, 2023), https://www.weissbrown.com/what-is-an-intellectual-property-ip-license/.
[13] See id.
[14] See IP Licensing Best Practices for Entrepreneurs, Faster Capital (March 7, 2024), https://fastercapital.com/content/IP-licensing-best-practices--Maximizing-Market-Potential--IP-Licensing-Best-Practices-for-Entrepreneurs.html#What-is-IP-licensing-and-why-is-it-important-for-entrepreneurs-
[15] See id.
[16] Anton Loffe, The Role of Intllectual Property on Startup Valuation, Borstch (Feb. 20, 2024), https://borstch.com/blog/startup/the-role-of-intellectual-property-on-startup-valuation.
[17] See id.
[18] See id.
[19] See id.
[20] See id.
[21] See Luke MacDonald and Daniel Tucker, Startups and IP Protections: Fuel Growth and Protect your Future, Reuters (March 20, 2023, 12:37 PM), https://www.reuters.com/legal/legalindustry/startups-ip-protections-fuel-growth-protect-your-future-2023-03-20/.
[22] See id.
[23] See Dreyfus, What Are the Benefits of Licensing Your Intellectual Property, Dreyfus (March 7, 2023), https://www.dreyfus.fr/en/2023/03/07/what-are-the-benefits-of-licensing-your-intellectual-property/.
[24] See id.
[25] See id.
[26] See IP Licensing and Collaborations for Sustainable Entrepreneurship, Faster Capital, https://fastercapital.com/topics/ip-licensing-and-collaborations-for-sustainable-entrepreneurship.html (last visited Apr. 21, 2024).
[27] See David Michaell, David J. Kappos, and John Villasenor, Developing Effective Intellectual Property Partnerships, MIT Sloan (June 16, 2015) https://sloanreview.mit.edu/article/developing-effective-intellectual-property-partnerships/.