I have a tricky start up (for those of you that know me, no, this is not rangoon-related), but I have a start-up, similar to a credit-rating agency, which is heavily dependent on intellectual property patents. I own a provisional patent, and am confident it will protect me enough to generally speak about the idea to investors. But I still think I should consult a intellectual property lawyer first, to further cement my patent and maybe even put in for a non-provisional patent before I try to court investors.
I’m thinking of offering an equity position of 5% to 10% to the best intellectual property lawyer I can find. Thoughts?
I know this is hard to advise on without knowing my business, but lets just assume the idea is decent. Future cashflows will be HUGE. Absolutely massive. And risks are of the level of your typical start-up. Under those assumptions, what do you guys think? I have little to no money to pay for a truly good intellectual property lawyer.
I mean… it depends on how good they think your idea is, right? If it sounds like you have the next Google, then sure, I will work for you for 10% stake. If your idea is iPad for dogs, I would probably want some cash…
This is beyond my expertise but from what I’ve learned from my friends in start-ups and VC space (and even my current boss!), you want to avoid giving away pieces of the pie unless you absolutely need to. A common mistake people make is that they’ll sell pieces of their business for too cheap just so they can get initial financing, and while that’s not a mistake if your business goes bust, it will be a mistake if your business really crushes it. In that case you’re basically offering the investor a partnership position even though they don’t bring any special expertise to the table.
On the other hand, if you’re in a particular business where litigious outcomes can be a big component of your company’s financial performance, then you may need to make a different decision. There are a number of IP-licensors and consulting firms whose legal operations are the backbone of their business. For these kinds of firms, a strong legal department is at least as important as R&D. 5-10% seems like a large equity position to give up though; would it not be possible to hire this guy and just pay him contingency fees?
Let me also just say from personal experience that I recently joined a hedge fund that’s essentially a carve out from a larger investment management firm. We want to keep our team as lean as possible. Certain things were negotiable when I was discussing my compensation package, but the one thing that my PM would not budge on was equity. I asked about this in any number of ways and it didn’t happen. For me, I want a piece of the upside if the fund does well especially since I’m coming in at the ground level. However, from his perspective he probably feels like he didn’t really know me and if he believed his fund was going to be successful, why offer up partnerships prematurely? From what I understand, it was the same reason why he didn’t want to be seeded by a larger or concentrated investor.
Anyway, my feedback is just based on the experiences I’ve had, but if I were running my own business and now esesntially being part of a “start-up” business, my general sense is that you shouldn’t give up the keys to your kingdom unless you absolutely have to. Of course, the problem with your business is that if you don’t have cash to pay them, either the contingency fees you offer him will have to be very compelling or you will probably need to give up equity. This would then lead me to ask my question in that if your business is so good, why don’t you have funding to pay for an attorney? What kind of defensible IP company can’t make an investment case to bring on a legal professional and have the LP’s bear some of that cost?
Numi makes a good point. You may be stuck having to give up equity, but maybe look for a partner who can bring more to the table than just legal skills, then use the equity capital provided to pay the lawyer.
The one good thing about having the IP lawyer as an equity partner is that it would make it very much in his interest to protect that capital as closely as possible. But maybe 5% or 10% wouldn’t be enough to really motivate them. I guess it depends on how awsome the business idea is.
What’s this about crab rangoon? I’ve always wanted to take crab rangoon west of the Rockies. Never could figure out why you can’t get it on the left coast. Hippies…
For the donuts or the coffee? I was looking at franchises lately. I swear I saw a Dunkin Donuts in SanFranciso leading up to Market Street, across from a California Pizza Kitchen that seemed like it was going out of business…
A very reasonable question, the issue at this point is I’m worried about approaching funding before I’m completely secure with my intellectual property. This is part of my question that I unfortunately didn’t articulate, should I reach out to make my IP concrete first? or should I reach for funding and then IP. I have a decent provisional patent, which is just as good as a non-provisional patent for the next 7-months. But I still feel uneasy.
I know this sounds stupid, but were talking a massive cut of the economy. Similar to the scale that amazon gets a cut of economic activity. Although the idea is nothing like amazon. I don’t know how the idea came into my head of all heads, but I think it’s good, and I’ve tossed it out to some trusted people, and they are initially impressed with the idea, so it does have some curb appeal.
It really needs a massive influx of cash to build brand equity, and then a smaller portion to actually operate. The amount of brand equity needed to be a success would normally deem most ideas not viable, however this idea is patentable, and thusly buys 20 years to build that brand equity, making it more of a feasible idea than some others. This is one reason the IP is so important, the other is that it could be easily replicated. For instance, Moody’s credit rating agency has very little going for it other than a very string brand-- this more from track record than marketing, but still.
I know advising with no idea about my business is tough, but I’m getting exactly the type of input, less the crab talk, that i was looking for. Leading my thoughts in the right direction, and giving them some structure-- Much appreciated
Do you have any partners? If you’re looking at 90-95% equity for yourself with the rest covering legal expenses, I would do it in a heartbeat. I’m hesitant to believe your addressable market approaches Amazon or that brand can be built that quickly with cash, but look at the various outcomes and probabilities. You sound confident in your idea’s feasibility, which is great and necessary for success, but most startups fail. I don’t know of any entrepreneur that doesn’t expect success, yet statistics don’t lie. Should that happen and you gave the IP lawyers equity, you’re out nothing. Should it be successful and approach Amazon-esque levels, the equity given away will be worth a lot, but relative to your 90% how much will that ‘hurt’? I’m sure Mark Zuckerberg regrets giving stock instead of cash to that guy who painted Facebook’s offices, but with a 15 billion net worth I doubt that he’s losing much sleep over the ~$100m “mistake.” Finally, you could be on the path to success but have your idea stolen because your IP wasn’t secure and have no recourse.
Granted that is dramatically simplifying potential outcomes, but you get the idea. I am in a similar position with an idea currently being evaluated and expect to move towards patenting in the next few months, and have no qualms about making sure it’s airtight from the beginning and aligning interests by offering equity in lieu of cash. Additionally, it’s worrying that you have “little to no money to pay for a truly good intellectual property lawyer.” In this arena you typically get what you pay for, so I would highly advise against shopping around for the cheapest lawyer. Also, I’m currently working with a group that bought a company out of receivership that has a lot of potential. The former company had a great idea, great product, and great employees, but couldn’t manage cash and ran out before revenue could ramp. Avoiding hard expenses is crucial - if you run out of cash you will either go bankrupt or get significantly diluted by future investors, so why not get slightly diluted up-front and secure a lawyer aligned with the company’s interests?
Obviously whether or not they will take equity depends on how good the idea is, how well-organized your business plan and projections are, how good of a salesman you are, and the lawfirm’s policies. Don’t expect a big, prestigious law firm to accept equity - they aren’t in the private equity business, they operate on cash. Also, as bchad said, if you’re giving away equity, try to find someone who can serve multiple roles (at least an IP lawyer who can be your go-to for anything legal-related) so you aren’t too fragmented or apportioning too much equity.
Wow, it’s great to know that your idea is “decent.” Great to see the confidence and I’m sure the guys down on Sand Hill Road will be beating down your door just for the opportunity to talk to you.
Pitch your company to the large legal firms that represent startups. I pitched my company to one of the largest tech law firms and they had a staff do all of our legal work pro bono under the unwritten terms that all M&A or IPO legal work is billed to their firm. This is pretty common in the Valley. If your company is as good as you claim, it shouldn’t be hard to sign them on to do all of the requested IP work for you.