Ask HN: Starting a Company on a Cofounder's Patent

> but my friend thinks his patent is worth >$100m

This is almost certainly delusional, especially if it's a software patent. Although that may not prevent you from building a $100m business on it.

> and wants to maintain personal ownership of the patent.

This was one of the WeWork shenanigans with the trademark being held by the owner.

> I'm worried that if we start a company that uses the invention without owning the patent, our company could be killed at any time by the patent holder. While I trust my cofounder, investors may be turned off and the patent could always end up in the hands of a less benevolent owner.

These are reasonable worries.

The bare minimum for any company with multiple founders is to sort out the initial equity distribution. This may not be 50/50 if it's his patent, but it needs to be something you're both happy with. It's a difficult conversation, but it only gets more difficult if you're successful and there's real money involved.

The bare minimum for the company should be a permanent non-revokable license for the patent. He may want it to be non-sublicensable and non-transferable, which are reasonable requests.

If you can't satisfactorily resolve this between you, your working relationship is not good enough to run a business between you.

You also need to ask your co-founder: when someone comes and offers $10m equity investment into the business on condition that the company is fully assigned the patent, would they really say no?

> The bare minimum for the company should be a permanent non-revokable license for the patent. He may want it to be non-sublicensable and non-transferable, which are reasonable requests.

I think this is the most important thing in your response. Hopefully, OP listens and lifts it with his co-founder.

Thank you! This could be a solution–I'll research this and discuss with my cofounder.

This will also put your co-founder in 100% control of whether or not an exit will happen. You won't be able to sell the business if a critical patent doesn't come along with it.

This is the correct answer on the patent. I have done this personally, where I held the patent and licensed it to the company and the terms were such that it was a permanent license but upon any non-exit dissolution event the license was cancelled and I maintained ownership.

Investors were fine with that because the company had exclusive rights to the patent (but could not sub-license) and in the case the company crashed and burned (which it did) I maintained ownership of the patent and the ability to license it or sell it or whatever. There are some terms you have to watch around new patents generated from the base patent. We had a patent attorney help us get the terms right so that no one got hurt but I was able to maintain ownership over the original patent. In my case, essentially, derivative patents were owned by the company although I had first right of refusal to purchase them upon a dissolution event. Also, we had a term that upon the successful acquisition of the company the company had the right to purchase the patent rights from me at a fair market price not to be less than a specified value. The purchase term in the contract was good and helped investors feel good about it because I didn't make the minimum purchase value crazy, it was a very fair term and nothing insane. If that minimum value was out of touch with reality this could be considered a poison pill to any acquisition, which is the last thing you want to do to a company.

To be clear, I think the OP's friend thinking his patent is worth >$100M is crazy talk at this point, and he needs to be more realistic with the true value. I've seen many people make these kinds of claims and generally that is a major warning sign IMO. In the best case, he could just be a young person not knowing how to value things, or he could be someone who doesn't understand how business & patents work. Just having a patent granted doesn't make it valid, defensible or valuable, many patents exist that are worthless and would crumble under the slightest challenge.

IMO, the OP is correct to be nervous about this situation but it should be fairly easy to resolve if his friend isn't unreasonable. The inventor just needs to provide a full license to the company along these lines.

If the patent is truly worth $100M, the business should be to license it to someone with large coffers not try to build a business around the use of the patent.

Generally it's not uncommon for companies to be started by licensing existing patents from other companies. The nature of that license matters more than who owns it - things like how long it will last, what you can and can't do, do you have exclusive rights, etc.

I am curious who paid for the patent application. Usually this is a lengthy and expensive process. I am also assuming that the inventor was employed somewhere while they developed this stuff - have the employers signed away their rights to the IP?

I would also point out that patents on their own are basically worthless. They do not protect small startups from being copied because you cannot afford to sue a competitor. At best they are a signal to investors that what you have invented is sufficiently unique as to pass a patent search, but even that is not saying a whole lot.

In short, I think the patent itself is a secondary issue. The problem seems to be a lack of incentive alignment between the founders. I would also suggest you look into some of the issues I've stated above, such as who the assignee currently is, who the co-inventors are, if there are any other parties who could have claims over it. This I see as a potentially bigger problem.

> I am curious who paid for the patent application. Usually this is a lengthy and expensive process. I am also assuming that the inventor was employed somewhere while they developed this stuff - have the employers signed away their rights to the IP?

This is also an important point. Everywhere I've ever worked has requested all patent rights. If the company is successful you may have to deal with a lawsuit (merited or not) from the founder's previous employer.

I would strongly recommend assignment to the company. As you allude to, any investor will want to see core IP in the ownership of the company, and to not have this, even in the presence of a cast-iron license agreement, will be off putting.

Having said that, you could mitigate through an arms length license agreement but it would have to be water-tight and obviously there's a tension between protecting your friend's patent and protecting the company's rights in that patent. The more it protects the company, the less confidence your friend would have (perpetual grant of rights vs time-limited, termination triggers etc).

You could also always start off with a license to give the company confidence, but if you are subsequently looking to fundraise and see investors are being put off, look to assign the patent to the company. The license could even incorporate an option to purchase to give the company further certainty that for the right price it could acquire the rights.

Hopefully some food for thought!

I have been in similar situations and I would (and did) go for putting the patent into the company or walking away. Maybe with your shares vesting based on milestones. Companies do license patents (in my country this would put a strain on the company as a license implies you have to pay for it and that sets all kinds of precedents with respect to value etc, not sure how that works elsewhere) but those are usually in different situations; if you like each other and work well together, then this is the better (short and long term) option in my opinion.

Edit: also, and again in my experience, investors and buyers will find the company to be worth a lot more; we had a perpetual license with all the protections in the past and we had a lot of investor hesitance to take risks as they were worried about the IP for the core product of the company not actually being in the company. The license did nothing to alleviate that.

yes you can license the patent to the startup under a non-revocable license. Make sure that the license rights pass on in case of "change of control" (acquisition, merger, sale). You should be able to google for this agreement. its pretty standard.

if you do a non-revocable, transferable license grant...it should be investor friendly.

You say he worked on this for many years. How old is the patent? Could be new or old but it makes a difference as they expire after 17 years.

Also do your own informal search for prior art to at least understand whether his patent is novel... most aren’t. Patent examiners famously do not do a good job at this determination.

Also the patent may well be worth 100m in his dreams but in the real world it is execution of ideas that matters and makes value. Ideas are worth basically zero without execution. But he may take offense if anyone tells him this!

Of course patents may be worth slightly more than bare ideas but it really depends on the patent and the prior art. Many patent lawyers will gladly file any patent as long as they are paid, even for a poor quality idea that should be unpatentable or that has prior art, or that offers no protection due to workarounds being available. Good luck.

> Could be new or old but it makes a difference as they expire after 17 years.

Assuming US, it would only be 17 years if the patent was filed before 1995. The term then was 17 years after the patent issued. For patents filed 1995 or later, the term is 20 years from the date of filing.

I wouldn't proceed. The problem is your partner did his work previously and your friend feels like he has a 100 million dollar worth of value.

How is he going to extract that 100 million? Through the company you will build for him. Any licease he assigns he will want 100m value for it. If things go well problems will start over how much each should get. If things don't he has an escape route ready. Worse if things go really well he can sell a licease to another company with bigger pockets.

I would create my own company and buy access to his patient through a percent of ownership + a fixed amount per product/service sold for a period of time with the right to renew.

Google was started based on a patent owned by Stanford (PageRank). This was kind of bad for Google, though, as Stanford ended up making hundreds of millions off them for providing an exclusive license. The patents have only just expired this year.

"Bad for Google" - you're making the opposite point that you think. In practice it doesn't matter who owns the patent, what matters are the licensing terms. Google make hundreds of millions in a day now, and PageRank was probably irrelevant to Google's core revenue streams within a few years.

Am I? If Google had owned the patent, they wouldn't have had to pay Stanford to license it, saving loads of shares/money, and the licensing terms would be moot.

Patents do not give the assignee any protection against IP theft. It merely gives them the right to litigate.

I’m not suggesting this idea as your primary position. However, your new company could just ignore his patent and infringe. If your company is “successful” it will likely have more financial wherewithal than your friend. He’d have to raise a lot of money to fight your company.

This is clearly and obnoxious move, but totally legal (IANAL but I hold 5 patents).

Also, have you read the patent? The protection is only offered to the claims not the specification (all the rest of the text). Do the claims actually cover the up you care about or could you do what you want differently (even if covered in the specification) without doing what’s in the claims?

The patent may not actually cover what you want to do. Alternatively, can you find other prior art that negates the claims? The patent issue process does not perform and exhaustive search on prior art. It could by that you could invalidate the claims if it ever claim to litigation.

Perhaps you could have an agreement in place that should the company be dissolved, the patent gets reassigned back to him.

If the patent is where significant value of the company lies this will be an big issue for investors.

I'm a VC and I would be ok with this arrangement.

It's important that the patent is owned by the company, but if the company ends up failing, I've already lost my money anyways, and the likely value I'll get out of liquidating some IP is negligible.

Stipulating that the patent is worth $100 million. Do you want to be in business with someone who isn't satisfied with $50 million? Someone who sees you as a competitor? Someone who doesn't want you to get rich? Good luck.

Tell us the patent number? I understand there may be good reasons to not share it, and you’re still getting good answers regardless. Still just thought I’d ask as it would be interesting to see HN pick it apart.

Delusional or not - I think his thinking is reasonable. That said, you should ask him to give perpetual license to the company and it's a win-win.

You're effectively asking your friend to start a company with you and invest whatever the patent is worth (maybe $100m, maybe $0) without any equivalent input from you. Why would your friend do that?

In your situation I would suggest to your friend that he starts the company owning 100% of the IP (and maybe the company) and assigns you 50% with a 5 year vesting schedule and a 1 year cliff (so during year 1 you'd have nothing, at the end of year 1 you'd own 10%, at the end of year 2 you'd have 20%, and so on). You might want something that defines what happens if you exit before the end of year 5. That way he has much less risk personally because he retains ownership until the company has proved to be more worthwhile than holding the IP on its own.

You seem to think ideas have value without execution.

I meet people like this at hackathons sometimes.

They tend to say things like: “I want to start a company. I already have the idea. Since I supplied the idea, I’ll own most of the company but I’ll be really generous and let you have 10% equity if you just write the program.”

Things don’t work this way.

You seem to think ideas have value without execution.

No I don't. I think patents have value without execution - in so far as you can license the patent without doing the execution yourself. To that end, the author of the thread has to try and persuade the patent holder that it's better to go in to business with him than it is to license the patent to whoever will pay. That means mitigating the risk that the patent holder is taking by offsetting it over time.

But there are garbage patents.

Sure. Maybe the one the original thread author is talking about is garbage, but I'm willing to be charitable and accept he probably isn't an idiot and has done a bit of due diligence to check. So, assuming the patent in question isn't garbage, what I said stands.

That’s a pretty large assumption though. Most people including many, many, tech people I have met are, to use your word, idiots about patents, essentially suspending all disbelief as if it is some kind of powerful magical certificate that validates the idea.

So what you said stands but only in a world I haven’t encountered, and I have a few patents and have been around the block on this one.