Intellectual Property (IP) is an umbrella term for the various legal entitlements which attach to the trade secrets, copyrights, trademarks and patents (software) owned by the business. All businesses have IP, but in the software business, IP may represent virtually all the company's value. However, not all IP is equal in value to the buyer and only some of it is of serious concern during due diligence and the definitive agreement negotiation process.
It should go without saying that trade secrets should be protected and good employee and contractor agreements can protect you from greed or malice. Trademarks and copyrights are relatively easy and inexpensive to get and you should obtain them. As time goes by and your company and products become successful and gain market visibility, they grow in value. However, relatively few buyers will care about trademarks in particular because they usually don't carry forward the company or product names associated with their acquisitions. Patents are occasionally very valuable, but more often not. We find few patents that can generate serious cash, particularly if a firm's products haven't demonstrated market acceptance. Few small software companies have the financial resources to defend them in any event. Nonetheless, buyers will want documentation on these aspects of IP to attach to the definitive agreement.
As a seller, you have to convince a buyer that you own the assets you're selling and it's unlikely a third party can make a claim to the contrary. Further, the representations and warranties you must agree to in the definitive agreement will largely focus on problems that might result from challenges to your ownership of the core software assets and specify the consequences to you if that happens. The reps and warranties negotiations are typically the most contentious part of the selling process and good planning and execution on the basics long before you decide to sell will make your life a lot easier. If you do nothing else, make sure you have documentation to establish clear ownership of the ideas and code in your software; this is a critical point. You must have written agreements with employee and contract developers that clearly state that your company owns their work product. If you don't, you are making a dangerous mistake.
Bill Montgomery, vice president, Corum Group, 10500 NE Eighth St., Bellevue, Wash. 98004; 425/455-8281. E-mail: billm@corumgroup.com.
Company/ Description Acquired by Price/Terms Revenues Multiple KnowledgeStorm TechTarget $58,200,000 $12,000,000 4.85 * Internet (TTGT) Terms: Cash search and stock engine services Cognos (COGN) IBM (IBM) $5,000,000,000 $1,020,000,000 4.90 * Business Terms: Cash intelligence and stock solutions ePairs Perficient $5,000,000 $6,000,000 0.83 * Oracle- (PRFT) Terms: Cash Siebel IT and stock consulting one45 Software Cytiva $1,430,000 $1,200,000 1.19 * Medical Software Terms: Cash education (CRXFF.PK) and stock software
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