Investors are not interested in patents alone; they expect tax and legal matters to be arranged properly too. V.O. attorney-at-law Nick Oostenbroek: ‘Entrepreneurs want to have everything under control, but lack an overview in many cases. They are often too close to the matter at hand to be able to see the overall picture.’
Your organisation has come up with a great invention, which was preceded by years of research. The invention is a success, the patent is granted and financiers decide to back your start-up. In short, everything is on the right track, or so it would. In practice, this doesn’t always seem to tell the whole story. Have you thought about who or what will legally own your patent rights and have you taken all of the various tax aspects into consideration? Oostenbroek: ‘Experience has shown me that things will go wrong if you fail to arrange any of the above properly. This can easily be avoided by adopting a multidisciplinary approach. Besides good patent protection, assistance in civil and tax-related matters is an absolute must too.’
Technical company and financier
‘A technical company comes up with a great invention,’ says Oostenbroek, ‘and tells a wealthy client all about it. However, although the client wants the product and a patent has been granted for the invention in question, the invention is not production-ready yet. A machine still needs to be built. A million euro is needed for the next step in the process. Neither of the above are a problem for the wealthy client. Unfortunately, this is where the problems start. The rights to the invention are all owned by the company of which the technical office forms part. This is not sensible: if the technical company ever goes into liquidation, you will have lost everything. Development and sales need to be separated from each other.’
The investor wants to set up a so-called IP safehouse: a new company in which all IP rights are placed. If the invention is a success, the new company (a private limited company) could be worth millions. The wealthy client is experienced and comes up with what seems to be a reasonable proposal: the technical office will contribute its invention for nothing, the financier will commit itself to a loan of one million euro and will hold half of the total number of shares in the new organisation. It all sounds a little bit too good to be true. Oostenbroek: ‘Inventors want to attract investors and, as such, are inclined to consider any proposal that sounds reasonable. With this in mind, it is important to thoroughly discuss all of the various legal and financial consequences of this situation.’
The solution suggested by the tax specialist
In this type of situation, a tax specialist should be consulted, all being well. In this case, he came up with the idea of splitting up the existing private limited company. To summarise, this will mean that one part of the split-up company will continue as a technical company, while the patent rights will remain in the other split-up part of the company. The latter company will then issue new shares, which the new partner will buy. In this way, the investor becomes a real investor and the IP rights are not placed elsewhere. It could be ‘dangerous’ to move IP rights where tax considerations are concerned.
Investors prefer legal and tax-related matters to be arranged properly straight away. It is wise to bear this in mind right from the very start. The V.O. lawyer: ‘I regularly have ‘road map discussions’ with business owners, after which we consider possible legal forms, possible mutual agreements and tax concerns and risks, both now and in the future.’