Quick Tips

Conducting Due Diligence

Over the years, Greg Coticchia, now CEO of online billing provider eBillingHub, and Stephan Zoder, a Sr. Product Manager currently with IBM’s software group, have worked both sides of deals involving the acquisition of technology licenses, reseller agreements, corporate acquisitions, and other transactions in which proprietary technologies changed hands.  At a recent Product Strategy Network Roundtable, they discussed the nuts and bolts of acquiring intellectual properties.  In this article summarizing that Roundtable, ‘i.p.’ refers interchangeably to technology, patents, and proprietary products which can be acquired in various ways including licenses, reseller agreements, and company acquisitions.

• Do your market analysis.  Ask: What is the I.P. owner selling?  What was their run rate?  Did they have a direct sales force, indirect sales force?  Talk to your own customer base to understand what their receptivity would be to this new I.P., if you happened to have it. 
• Find a market.  The business case for patented I.P. has to be very strong because 98% of patents are not commercially viable.  It may sound like a good idea, but is it something there’s a market for?
• Understand the competitive environment.  Think of a patent as a method for doing X.  There may be 25 other ways to do it, but the patent defines only one.  Particularly in software, the barriers to entry may not be as significant as in physical devices.  So make sure you understand the competitive environment because patents offer only limited protection.
• Check for exposure.  Regardless of how you introduce a piece of intellectual property into the market – whether as an OEM part, through a reseller agreement, or by way of an end user license – make sure you’re not exposing yourself or your customers to claims of patent infringement.  Make sure you understand potential exposures early on in the vetting process.
• Examine ownership.  If you’re doing an acquisition, look at the ownership of all of the trademarks, copyrights, patents and all the other intellectual property items associated with that deal.
• Engage independent experts.  Don’t be a do-it-yourselfer; there’s a certain I.P. exposure that happens when you look at other people’s stuff to understand it, and to judge whether you can buy it or not.  So involve a third party who can do that evaluation for you.  It’s the only way to get an independent, objective picture.  It will also protect you from claims of copying or stealing I.P. ideas.  The people who do these third-party evaluations are mostly technologists who understand the business and typically work for private equity firms.  Also, in hostile acquisitions, you can’t just go directly to the company to do your due diligence, but you can engage a third party to do it for you.
• Sidestep biases.  Third parties can help avoid two biases: one is that the executive who championed the idea can be very biased throughout the process.  The other is from staff engineers who almost always believe they can do it themselves.  Third-party experts can determine: is this I.P. architected correctly?  Will it scale?  Will it meet the purpose?  The best evaluations would involve a combination of a lawyer and a technologist to jointly evaluate what the other side has.
• Test the I.P.  There are lots of publicly-available third-party code test tools.  Some are freeware, others you have to pay for.  Many of their creators have people on staff who can help you, who can perform the scan, do the analysis, and so forth.  And it’s usually cheaper than going through a bank or a law firm.
• Hire a lawyer.  Whether you’re entering into a reseller agreement or an acquisition, retain a trusted business attorney who can help you get all those issues on the table and then contractualize them. 
• Tie in technologists.  When you buy into another company to get their I.P., their people may be passionate and want to continue creating.  But once they’ve created something and then you buy it, they might leave and go on to create something similar to what you just bought.  So the buyer needs to mitigate that risk.  First, try to tie them up non-competes for as long as possible.  Or they tie them up financially for a period of time to extend the period where they’re committed to the company.
• Know the pieces.  Make sure you really have the rights to distribute the I.P.   Since there’s so much plug-and-play software and technology today, a Sun or Oracle license could be embedded in the I.P. that the seller may not even be aware of and payments may be associated with those pieces.  Did they embed any other third party license when they bought an off-the-shelf component they’re using?  Are they paying royalties on that?  Was it a one-time usage component?  There’s also export licensing; can you ship this I.P. overseas?

Intellectual Property Acquisition Quick Tips Series:

• Part I of III: Intellectual Property Acquisition:
  Conducting Due Diligence
• Part II of III: Intellectual Property Acquisition:
  Contracting and Negotiating
• Part III of III: Intellectual Property Acquisition:
  Achieving success
  

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